    Financial Management: Improvements Under Way but Serious
    Financial Systems Problems Persist (26-SEP-06, GAO-06-970).

    The ability to produce the financial information needed to
    efficiently and effectively manage the day-today operations of
    the federal government and provide accountability to taxpayers
    continues to be a challenge for most federal agencies. To help
    address this challenge, the Federal Financial Management
    Improvement Act of 1996 (FFMIA) requires the Chief Financial
    Officers (CFO) Act agencies to implement and maintain financial
    management systems that comply substantially with (1) federal
    financial management systems requirements, (2) federal accounting
    standards, and (3) the U.S. Government Standard General Ledger at
    the transaction level. FFMIA also requires GAO to report annually
    on the implementation of the act.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-970
        ACCNO:   A61429
      TITLE:     Financial Management: Improvements Under Way but Serious
    Financial Systems Problems Persist
         DATE:   09/26/2006
      SUBJECT:   Accounting standards
    	     Audit reports
    	     Federal agency accounting systems
    	     Financial management
    	     Financial management systems
    	     Financial statements
    	     Information management
    	     Internal controls
    	     Noncompliance
    	     Reporting requirements
    	     JFMIP Joint Financial Management
    	     Improvement Program

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    GAO-06-970

                     United States Government Accountability Office

    Report to Congressional Committees

    GAO

    September 2006

    FINANCIAL MANAGEMENT

         Improvements Under Way but Serious Financial Systems Problems Persist

    GAO-06-970

    FINANCIAL MANAGEMENT

    Improvements Under Way but Serious Financial Systems Problems Persist

      What GAO Found

    While the number of CFO Act agencies receiving unqualified opinions on
    their financial statements has increased significantly since 1997, the
    number of CFO Act agencies that did not substantially comply with FFMIA
    has remained fairly constant as shown below. Although agencies have made
    improvements and have other enhancements under way, the systems
    deficiencies that have prompted unfavorable FFMIA assessments indicate
    that the financial management systems of many agencies are still not able
    to routinely produce reliable, useful, and timely financial information.
    GAO views the continuing lack of compliance with FFMIA and the associated
    problems with agency financial systems to be significant challenges to
    improving the management of the federal government.

        CFO Act agencies not in compliance

    24

    21 21

                      1997 1998 1999 2000 2001 2002 2003 2004 2005

        Year

    Source: GAO analysis, based on independent auditors' financial statement
    audit reports prepared by agency inspectors general and contract auditors
    for fiscal years 1997 through 2005.

    For fiscal year 2005, auditors for five agencies provided negative
    assurance that agency systems substantially complied with FFMIA as allowed
    by the Office of Management and Budget's (OMB) current audit guidance.
    This means that nothing came to their attention to indicate that agency
    financial management systems did not substantially comply with FFMIA
    requirements. GAO continues to believe that this type of reporting is not
    sufficient for reporting under the act. In addition, negative assurance
    may provide the false impression that the auditors are reporting that the
    agencies' systems are compliant. In contrast, auditors for the Department
    of Labor (Labor) provided positive assurance, which is an opinion, by
    reporting that Labor's financial management systems substantially complied
    with FFMIA requirements-a reporting practice that adds more value.
    Auditors have expressed concern about providing positive assurance because
    of the need to clarify the meaning of substantial compliance. In addition,
    some auditors stated that a change in OMB's guidance that permits negative
    assurance would be necessary for them to provide an opinion on FFMIA
    compliance.

    To help address financial management systems deficiencies, OMB continues
    to move ahead on initiatives to enhance financial management in the
    federal government. Moreover, the continuing leadership and support of
    Congress will be crucial in reforming financial management in the federal
    government.

    United States Government Accountability Office

    Contents

    Letter 1
    Results In Brief 2
    Background 8
    Scope and Methodology 12
    FFMIA Assessments Identify Continuing Systems Weaknesses 13
    Federal Financial Management System Initiatives Continue to Evolve 31
    Conclusions 51
    Agency Comments and Our Evaluation 51
    Appendix I Requirements and Standards Supporting Federal Financial
    Management 55
    Financial Management Systems Requirements 55
    Federal Accounting Standards 58
    Government Standard General Ledger 59
    Internal Control Standards 59

    Appendix II Publications in the Federal Financial Management Systems
    Requirements Series

    Appendix III Statements of Federal Financial Accounting Concepts,
    Standards, Interpretations, and Technical Bulletins

    Appendix IV AAPC Technical Releases

    Appendix V Checklists for Reviewing Systems under the Federal Financial
    Management Improvement Act

    Appendix VI Comments from the Office of Management and Budget 66
    Appendix VII Auditors' FFMIA Assessments for Fiscal Year 2005

    Appendix VIII         GAO Contact and Staff Acknowledgments             69
    Table         Table 1: Key Causes of Systems Implementation Failure     37
    Figures            Figure 1: Auditors' FFMIA Assessments for Fiscal
                       Years 1997 through 2005 Figure 2: Problems Reported
                     by Auditors for Fiscal Years 2001 through 2005 Figure
                      3: Auditors' FFMIA Assessments for Fiscal Years 1997
                           through 2005 Figure 4: Auditors' Assessments of
                                 Substantial Compliance with FFMIA's Three
                           Requirements for Fiscal Years 1997 through 2005
                        Figure 5: Problems Reported by Auditors for Fiscal
                       Years 2001 through 2005 Figure 6: Overall Vision of 4 6 14
                        the Financial Management Line of BusinessFigure 7:  16 22
                             Governance Structure Figure 8: Agency Systems  40 47
                                                              Architecture     56

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
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    separately.

    United States Government Accountability Office Washington, DC 20548

    September 26, 2006

    The Honorable Susan M. Collins Chairman The Honorable Joseph I. Lieberman
    Ranking Minority Member Committee on Homeland Security and Governmental
    Affairs United States Senate

    The Honorable Tom Davis Chairman The Honorable Henry A. Waxman Ranking
    Minority Member Committee on Government Reform House of Representatives

    The lack of reliable, useful, and timely financial data needed to
    efficiently and effectively manage the day-to-day operations of the
    federal government and provide accountability to taxpayers and the
    Congress continues to be a weakness at many federal agencies. To address
    this longstanding weakness, the Congress mandated financial management
    reform within the federal government by enacting the Chief Financial
    Officers (CFO) Act of 1990.1 The CFO Act laid the foundation for a
    comprehensive reform of federal financial management by establishing a
    leadership structure, requiring audited financial statements, and
    strengthening accountability reporting. This act also requires agencies to
    implement modern financial management systems in order to attain the
    systematic measurement of performance; the development of cost
    information; and the integration of program, budget, and financial
    information for management reporting. The end goal of the CFO Act is to
    greatly enhance the ability of managers to do their jobs by providing the
    full range of financial information needed for day-to-day management.

    The Federal Financial Management Improvement Act of 19962 (FFMIA) was
    enacted on September 30, 1996, and builds on the foundation laid by

    1

    Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).

    2

    Federal Financial Management Improvement Act of 1996, Pub. L. No. 104-208,
    div. A., S: 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996).

        Page 1 GAO-06-970 FFMIA Fiscal Year 2005 Results

    the CFO Act by highlighting the need for agencies to have financial
    management systems that are able to generate reliable, useful, and timely
    information needed to make fully informed decisions and to ensure
    accountability on an ongoing basis. FFMIA requires the major departments
    and agencies covered by the CFO Act3 to implement and maintain financial
    management systems that comply substantially with (1) federal financial
    management systems requirements, (2) applicable federal accounting
    standards, and (3) the U.S. Government Standard General Ledger (SGL) at
    the transaction level. The act also requires auditors to state in their
    audit reports whether the agencies' financial management systems comply
    with the act's requirements. In addition, we are required to report
    annually on the implementation status of the act. This report, our tenth,
    discusses

    (1) the auditors' assessments of agency systems' compliance with FFMIA
    requirements for fiscal years 1997 through 2005 and the financial
    management systems problems that continued to affect systems' FFMIA
    compliance in fiscal year 2005 and (2) the initiatives under way to help
    move federal financial management toward FFMIA compliance.

    We conducted our work from January through July 2006 in Washington, D.C.,
    Baltimore, Md., and Kansas City, Mo., in accordance with U.S. generally
    accepted government auditing standards. We requested comments on a draft
    of this report from the Director of OMB or his designee. We received
    written comments from the OMB Controller. OMB's comments are discussed in
    the Agency Comments and Our Evaluation section and reprinted in appendix
    VI.

    Results In Brief

    Since the passage of FFMIA, there has been progress in achieving the
    requirements of this landmark legislation. While improvements have been
    made throughout government, much work remains to fulfill the underlying
    goals of the CFO Act and FFMIA. Notably, the number of CFO Act agencies
    receiving unqualified opinions on their financial statements has increased
    significantly since FFMIA reporting began in 1997. In fiscal year 1997, 11
    of the CFO Act agencies attained unqualified opinions on their

    3

    The Department of Homeland Security (DHS) Financial Accountability Act,
    Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004), added DHS to the list
    of CFO Act agencies, increasing the number of CFO Act agencies to 24 for
    fiscal year 2005.

        Page 2 GAO-06-970 FFMIA Fiscal Year 2005 Results

    financial statements, while 194 agencies received unqualified opinions for
    fiscal year 2005. As shown in figure 1, the ability of federal financial
    management systems to fully address FFMIA requirements has not advanced at
    the same pace. In fiscal year 1997, 20 agencies were reported as having
    systems that were not in substantial compliance with at least one of the
    three FFMIA systems requirements, while in fiscal year 2005, auditors for
    18 of the CFO Act agencies reported that the agencies' financial
    management systems did not substantially comply with at least one of the
    three FFMIA requirements. While progress has been made in addressing
    financial management systems' weaknesses, the lack of substantial
    compliance with the three requirements of FFMIA, and the associated
    deficiencies, indicates that the financial management systems of many
    agencies are still not able to routinely produce reliable, useful, and
    timely financial information. Consequently, the federal government's
    access to relevant, timely, and reliable data to effectively manage and
    oversee its major programs, which is the ultimate objective, was and
    continues to be restricted.

    For fiscal year 2005, 18 of 24 CFO Act agencies were able to attain
    unqualified opinions on their financial statements by the November 15,
    2005, reporting deadline established by OMB. The independent auditor of
    the Department of State subsequently withdrew its qualified opinion on the
    department's fiscal year 2005 financial statements and reissued an
    unqualified opinion on these financial statements dated December 14, 2005.
    As a result, 19 CFO Act agencies received unqualified opinions on their
    fiscal year 2005 financial statements.

        Figure 1: Auditors' FFMIA Assessments for Fiscal Years 1997 through 2005

    In fiscal year 2005, auditors for five5 of the six other CFO Act agencies
    provided what is termed negative assurance of FFMIA compliance. In
    essence, they reported that nothing came to their attention during the
    course of their planned audit procedures to indicate that these agencies'
    financial management systems did not meet FFMIA requirements. Negative
    assurance is the level of assurance specified by the Office of Management
    and Budget's (OMB) audit guidance for reporting on FFMIA compliance. From
    our perspective, FFMIA requires auditors to provide positive assurance,
    which is an opinion, on FFMIA compliance. The auditors for one agency, the
    Department of Labor (Labor), provided positive assurance, as required by
    the act, when they reported that in their opinion, Labor's financial
    management systems substantially complied with the requirements of FFMIA.
    Providing positive assurance requires some additional testing beyond that
    typically performed by auditors to render an opinion on financial
    statements. For example, in performing financial statement audits,
    auditors generally focus on the capability of the

    The Department of Commerce (Commerce), the Environmental Protection Agency
    (EPA), the National Science Foundation (NSF), the Office of Personnel
    Management (OPM), and the Social Security Administration (SSA).

        Page 4 GAO-06-970 FFMIA Fiscal Year 2005 Results

    financial management systems to process and summarize financial
    information that flows into agency financial statements. In contrast,
    FFMIA requires auditors to take a broader perspective and consider the
    financial management systems capability to also reliably record and report
    financial information for a variety of purposes beyond financial
    statements. Thus FFMIA furthers the ultimate goal of improving financial
    management systems in the federal government and assisting agency managers
    in having timely access to reliable data for decision-making purposes.
    This in turn, will allow them to do their jobs more efficiently and
    effectively.

    For this reason, this second year of Labor's auditors providing positive
    assurance on FFMIA compliance continues to be a very noteworthy
    achievement by Labor. We look forward to other agencies opting to upgrade
    their level of assurance on this matter as required by the act. Auditors
    for the majority of the agencies we visited stated that additional
    guidance on the definition of substantial compliance would facilitate
    their assessments of financial management systems for FFMIA reporting.
    Some auditors also indicated that a change in OMB's guidance on FFMIA
    reporting would be necessary for them to shift to providing opinions on
    FFMIA compliance.

    As shown in figure 2, based on our review of the fiscal year 2005
    financial statement audit reports for the 18 agencies with systems
    reported not to be in substantial compliance with one or more of the three
    FFMIA requirements, the same six primary problems that we have previously
    reported continue to exist. While more severe at some agencies than
    others, the nature and seriousness of the problems reported indicate that
    most agencies' financial management systems are frequently unable to
    routinely produce reliable, useful, and timely financial information. We
    view the problems with agencies' financial management systems to be a
    significant challenge to improving the financial management of the federal
    government, because the problems indicate that many agencies are still a
    long way from accomplishing what was envisioned with the passage of the
    CFO Act of 1990 and the more recent passage of FFMIA in 1996.

    Figure 2: Problems Reported by Auditors for Fiscal Years 2001 through 2005

    In an effort to comply with FFMIA and address problems such as
    nonintegrated systems, inadequate reconciliations, and lack of compliance
    with the SGL, a number of agencies have efforts under way to implement new
    financial management systems, to upgrade existing systems, or to move to a
    shared service provider. Agencies anticipate that the new systems will
    provide reliable, useful, and timely data to support managerial decision
    making. However, significant problems in the development and
    implementation of new financial management systems were reported for
    several agencies in fiscal year 2005, especially when agencies did not
    follow appropriate best practices to ensure the efficient and effective
    implementation of these systems.

    OMB continues to move forward on initiatives that support the President's
    Management Agenda (PMA) to enhance financial management and provide
    results-oriented information in the federal government. A key initiative
    has been the further development of the financial management line of
    business to promote leveraging shared service solutions to enhance the
    government's performance and services. However, challenges exist in
    implementing the financial management line of business. For example, as we
    reported in March 2006,6 the requirements for agencies and private sector
    firms to become shared service providers and the services they must
    provide have not been adequately documented or effectively communicated to
    agencies and the private sector. OMB has not provided the current selected
    shared service providers with standard document templates needed to
    minimize risk, provide assurance, and develop understandings with
    customers on topics such as service-level agreements7 and a concept of
    operations. Further, processes have not been put in place to facilitate
    agency decisions on selecting a provider or focusing investment decisions
    on the benefits of standard processes and shared service providers. We
    made a number of recommendations to address these issues and OMB has
    projects under way to develop standard business processes, a common
    accounting code, and specific measures to assess the performance of the
    shared service providers to help address some shortcomings. Because the
    federal government is one of the largest, most complex organizations in
    the world, operating, maintaining, and modernizing its financial
    management systems represents a monumental challenge-from both cost and
    technical perspectives. As pressure mounts to increase accountability and
    efforts to reduce federal spending intensify, sustained and committed
    leadership will be a key factor in the successful implementation of
    governmentwide initiatives.

    While we are not making any new recommendations in this report, we
    reaffirm our prior recommendations aimed at enhancing OMB's audit guidance
    related to FFMIA assessments. Specifically, we recommended that OMB (1)
    require agency auditors to provide a statement of positive

    6

    GAO, Financial Management Systems: Additional Efforts Needed to Address
    Key Causes of Modernization Failures, GAO-06-184 ( Washington, D.C.: Mar.
    15, 2006).

    7

    A service-level agreement is critical for both the shared service
    providers and the agencies to be held accountable for their respective
    parts of the agreement.

    Page 7 GAO-06-970 FFMIA Fiscal Year 2005 Results

    assurance when reporting an agency's systems to be in substantial
    compliance with the requirements of FFMIA and (2) explore further
    clarification of the definition of "substantial compliance" to encourage
    consistent reporting.

    In commenting on a draft of this report, OMB agreed with our assessment
    that many federal agencies still need to make improvements to generate
    more accurate and timely financial information to optimize day-to-day
    operations. As in previous years, we and OMB have differing views on the
    level of audit assurance necessary for assessing and reporting on
    compliance with FFMIA. While OMB commended Labor's auditors for taking the
    steps needed to provide positive assurance and encouraged similar efforts
    at other agencies, it stated that requiring a statement of positive
    assurance for all agencies was not necessary. We continue to believe that
    a statement of positive assurance is a statutory requirement under the act
    and will continue to work with OMB on this issue. OMB did agree to
    consider clarifying the definition of "substantial compliance" in its
    future policy and guidance updates. Our detailed evaluation of OMB's
    comments can be found at the end of this letter.

    Background

    FFMIA is part of a series of management reform legislation passed by the
    Congress over the past two decades. This series of legislation started
    with the Federal Managers' Financial Integrity Act of 19828 (FMFIA), which
    the Congress passed to strengthen internal controls and accounting systems
    throughout the federal government, among other purposes. Issued pursuant
    to 31 U.S.C. S: 3512 (c), (d), still commonly known as FMFIA, the
    Comptroller General's Standards for Internal Control in the Federal
    Government9 provides the standards that are directed at helping agency
    managers implement effective internal control, an integral part of
    improving financial management systems. Internal control is a major part
    of managing an organization and comprises the plans, methods, and
    procedures used to meet missions, goals, and objectives. In summary,
    internal control, which under OMB's guidance for FMFIA is synonymous with
    management control, helps government program managers achieve desired
    results through effective stewardship of public resources.

    8

    Pub. L. No. 97-255, 96 Stat. 814 (Sept. 8, 1982) (codified at 31 U.S.C. S:
    3512 (c), (d)).

    9

    GAO, Standards for Internal Control in the Federal Government,
    GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999).

    Page 8 GAO-06-970 FFMIA Fiscal Year 2005 Results

    Effective internal control also helps in managing change to cope with
    shifting environments and evolving demands and priorities. As programs
    change and agencies strive to improve operational processes and implement
    new technological developments, management must continually assess and
    evaluate its internal control to ensure that the control activities being
    used are effective and updated when necessary. While agencies had achieved
    some early success in identifying and correcting material internal control
    and accounting system weaknesses, their efforts to implement FMFIA had not
    produced the results intended by the Congress.

    Therefore, in the 1990s, the Congress passed additional management reform
    legislation to improve the general and financial management of the federal
    government. This legislation includes the (1) CFO Act of 1990,

    (2) Government Performance and Results Act of 1993,10 (3) Government
    Management Reform Act of 1994,11 (4) FFMIA, (5) Clinger-Cohen Act of
    1996,12 (6) Accountability of Tax Dollars Act of 2002,13 (7) Improper
    Payments Information Act of 2002,14 and (8) Department of Homeland
    Security (DHS) Financial Accountability Act of 2004.15 The combination of
    reforms ushered in by these laws, if successfully implemented, provides a
    solid foundation to improve the accountability of government programs and
    operations as well as to routinely produce valuable cost and operating
    performance information. These financial management reform acts emphasize
    the importance of improving financial management across the federal
    government.

    In particular, building on the foundation laid by the CFO Act, FFMIA
    emphasizes the need for CFO Act agencies to have systems that are able to
    generate reliable, useful, and timely information for decision-making

    10

    Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993).

    11

    Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994).

    12

    Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996).

    13

    Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002) (codified at 31 U.S.C.
    S: 3515). The Accountability of Tax Dollars Act of 2002 extends the
    requirement to prepare and submit audited financial statements to most
    executive agencies not subject to the CFO Act unless they are exempted by
    OMB. However, these agencies are not required to have systems that are
    compliant with FFMIA requirements.

    14

    Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).

    15

    Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004).

    purposes and to ensure ongoing accountability. FFMIA requires the
    departments and agencies covered by the CFO Act to implement and maintain
    financial management systems that comply substantially with

    (1) federal financial management systems requirements, (2) applicable
    federal accounting standards,16 and (3) the SGL17 at the transaction
    level. FFMIA also requires auditors to state in their CFO Act financial
    statement audit reports whether the agencies' financial management systems
    substantially comply with these three FFMIA systems requirements.
    Appendixes I through IV include details on the various requirements and
    standards that support federal financial management.

    Guidance for FFMIA Issued by OMB

    OMB establishes governmentwide financial management systems policies and
    requirements and has issued two sources of guidance related to FFMIA
    reporting. First, OMB Bulletin No. 01-02, Audit Requirements for Federal
    Financial Statements, dated October 16, 2000, prescribed audit
    requirements, including specific language auditors should use when
    reporting on an agency system's substantial compliance with the three
    FFMIA requirements. Specifically, this guidance called for auditors to
    provide negative assurance when reporting on an agency system's FFMIA
    compliance. On August 23, 2006, OMB issued Bulletin No. 06-03, Audit
    Requirements for Federal Financial Statements, which superseded OMB
    Bulletin No. 01-02. The new bulletin did not substantially revise OMB's
    FFMIA audit guidance contained in Bulletin No. 01-02. Second, in OMB
    Memorandum, Revised Implementation Guidance for the Federal Financial
    Management Improvement Act (Jan. 4, 2001), OMB provides guidance for
    agencies and auditors to use in assessing substantial compliance. The
    guidance describes the factors that should be considered in determining
    whether an agency's systems substantially comply with FFMIA's three
    requirements. Further, the guidance provides examples of the types of
    indicators that should be used as a basis for assessing whether an
    agency's systems are in substantial compliance with each of the three
    FFMIA requirements. Finally, the guidance discusses the corrective action

    16

    The American Institute of Certified Public Accountants recognizes the
    federal accounting standards promulgated by the Federal Accounting
    Standards Advisory Board as generally accepted accounting principles. For
    a further description of federal accounting standards, see appendix I.

    17

    The SGL provides a standard chart of accounts and standardized
    transactions that agencies are to use in all their financial systems.

    Page 10 GAO-06-970 FFMIA Fiscal Year 2005 Results

    plans, to be developed by agency officials, for bringing their systems
    into compliance with FFMIA.

    Financial Audit Manual Section on FFMIA Developed by GAO and the President's
    Council on Integrity and Efficiency

    We have worked in partnership with representatives from the President's
    Council on Integrity and Efficiency18 (PCIE) to develop and maintain the
    joint GAO/PCIE Financial Audit Manual (FAM). The FAM provides specific
    procedures auditors should perform when assessing FFMIA compliance.19 As
    detailed in appendix V, we have also issued a series of checklists to help
    assess whether agencies' systems meet systems requirements. The FAM
    guidance on FFMIA assessments recognizes that while financial statement
    audits offer some assurance on FFMIA compliance, auditors should design
    and implement additional testing to satisfy FFMIA criteria. For example,
    in performing financial statement audits, auditors generally focus on the
    ability of the financial management systems to process and summarize
    financial information that flows into annual agency financial statements.
    In contrast, FFMIA requires auditors to assess whether an agency's
    financial management systems comply with system requirements, accounting
    standards, and the SGL. To do this, auditors need to consider whether
    agency systems provide reliable, useful, and timely information for
    managing day-to-day operations so that agency managers would have the
    necessary information to measure performance on an ongoing basis rather
    than just at year end. Further, OMB's current audit guidance20 calls for
    financial statement auditors to review performance information for
    consistency with the financial statements, but does not require auditors
    to determine whether this information is available to managers for
    day-to-day decision making as called for by the FAM guidance for testing
    compliance with FFMIA.

    18

    The PCIE-which is governed by Executive Order No. 12805 of May 11,
    1992-was established to (1) address integrity, economy, and effectiveness
    issues that transcend individual government agencies and (2) increase the
    professionalism and effectiveness of inspectors general personnel
    throughout the government. The PCIE is composed primarily of the
    presidentially appointed inspectors general. Officials from OMB, the
    Federal Bureau of Investigation, Office of Government Ethics, Office of
    Special Counsel, and Office of Personnel Management serve on the PCIE as
    well.

    19 GAO-01-765G, sections 701, 701A, 701B, and 260.58-.60.

    20

    OMB Bulletin No. 06-03, Audit Requirements for Federal Financial
    Statements (Aug. 23, 2006).

      Scope and Methodology

    We reviewed the fiscal year 2005 financial statement audit reports for the
    24 CFO Act agencies to identify the auditors' assessments of agency
    financial systems' compliance and the problems that affect FFMIA
    compliance. Prior experience with the auditors and our review of their
    reports provided the basis for determining the sufficiency and relevancy
    of evidence provided in these documents. Based on their audit reports, we
    identified reported problems that affect agency systems' compliance with
    FFMIA. The problems identified in these reports are consistent with
    longstanding financial management weaknesses we have reported based on our
    work at a number of agencies. However, we caution that the occurrence of
    problems in a particular category may be even greater than auditors'
    reports of FFMIA noncompliance would suggest, because auditors may not
    have identified all instances of noncompliance with systems requirements
    and included all problems in their reports. We also met with OMB officials
    to discuss their current efforts to improve federal financial management
    and address our prior recommendations related to FFMIA.

    In addition, we performed site visits to 12 agencies to assess the amount
    and type of FFMIA-related work being performed by the independent public
    auditors. The agencies selected for visits included the 5 agencies where
    auditors provided negative assurance of FFMIA compliance in fiscal year
    2005 (Commerce, Environmental Protection Agency (EPA), National Science
    Foundation (NSF), Office of Personnel Management (OPM), and Social
    Security Administration (SSA)); the agency where auditors provided an
    opinion, or positive assurance, of FFMIA compliance in fiscal year 2005
    (Labor); the 2 agencies where auditors provided negative assurance of
    FFMIA compliance in fiscal year 2004 but reported those agencies as
    noncompliant in fiscal year 2005 (the Department of Energy (Energy) and
    the General Services Administration (GSA)); and 421 of the agencies with
    the largest net costs as reported in the fiscal year 2005 Financial Report
    of the United States Government.22 We also met with representatives for
    the Inspector General of the Department of Defense (DOD), which has the
    largest net costs of any federal agency in fiscal year 2005, to confirm
    our understanding of its FFMIA-related audit procedures.

    21

    The Department of Agriculture, Department of Health and Human Services
    (HHS), Department of the Treasury, and the Department of Veterans Affairs
    (VA).

    22

    Department of the Treasury, 2005 Financial Report of the United States
    Government (Washington, D.C.: Dec. 2005).

    Page 12 GAO-06-970 FFMIA Fiscal Year 2005 Results

    We conducted our work from January 2006 through July 2006 in Washington,
    D.C., Baltimore, Md., and Kansas City, Mo., in accordance with U.S.
    generally accepted government auditing standards. We requested written
    comments on a draft of this report from the Director of OMB or his
    designee. We received written comments from the OMB controller. OMB's
    comments are discussed in the Agency Comments and Our Evaluation section
    and reprinted in appendix VI. We also received technical comments from OMB
    and the Departments of Health and Human Services and Transportation which
    we incorporated as appropriate.

    FFMIA Assessments Identify Continuing Systems Weaknesses

    While the 24 CFO Act agencies have made demonstrable progress in producing
    auditable financial statements and progress in addressing their financial
    management systems weaknesses since the passage of FFMIA, about
    three-fourths are still not substantially compliant with FFMIA's three
    requirements. In contrast, the number of CFO Act agencies receiving
    unqualified opinions on their financial statements has increased
    significantly since 1997, when FFMIA reporting began. In fiscal year 1997,
    11 of the CFO Act agencies attained unqualified opinions on their
    financial statements, while 1923 agencies received unqualified opinions in
    fiscal year 2005. As shown in figure 3, the ability of federal financial
    management systems to address FFMIA requirements has not advanced at the
    same pace. In fiscal year 1997, 20 agencies were reported as having
    systems that were not in substantial compliance with at least one of the
    three FFMIA systems requirements. In fiscal year 2005, auditors for 18 of
    the CFO Act agencies reported that the agencies' financial management
    systems do not substantially comply with at least one of the three FFMIA
    requirements.

    23

    For fiscal year 2005, 18 of 24 CFO Act agencies were able to attain
    unqualified opinions on their financial statements by the November 15,
    2005, reporting deadline established by OMB. The independent auditor of
    the Department of State subsequently withdrew its qualified opinion on the
    department's fiscal year 2005 financial statements and reissued an
    unqualified opinion on these financial statements dated December 14, 2005.
    As a result, 19 CFO Act agencies received unqualified opinions on their
    fiscal year 2005 financial statements.

        Figure 3: Auditors' FFMIA Assessments for Fiscal Years 1997 through 2005

    Auditors' assessments for three agencies changed from fiscal year 2004 to
    2005. For fiscal year 2005, auditors for OPM were able to provide negative
    assurance that OPM's financial management systems, as a whole, were
    substantially compliant with FFMIA's three requirements. Conversely,
    auditors for Energy and GSA reported that those agencies' financial
    management systems did not substantially comply with FFMIA requirements in
    fiscal year 2005, but had not reported any FFMIA compliance issues at
    those federal agencies in fiscal year 2004. At Energy, the auditors
    indicated that Energy's systems problems stemmed from the implementation
    of a new accounting system. At GSA, the auditors reported recently
    identified internal control weaknesses over financial reporting. In
    addition, consistent with the DHS Financial Accountability Act of 2004,24
    which added DHS to the list of CFO Act agencies, DHS's auditors reported
    that the department's financial management systems did not substantially
    comply with any of the three FFMIA requirements for fiscal year 2005.

    The DHS Financial Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct.
                                       16, 2004).

                   Page 14 GAO-06-970 FFMIA Fiscal Year 2005 Results

    Figure 4 summarizes auditors' assessments of agencies' compliance with the
    three requirements of FFMIA for fiscal years 1997 through 2005 and
    suggests that the instances of noncompliance with FFMIA's three
    requirements have remained fairly constant. In particular, in fiscal year
    2005, auditors for eight agencies25 reported that their agencies' systems
    were not in substantial compliance with any of the three FFMIA
    requirements-federal financial management systems requirements, applicable
    federal accounting standards, or the SGL at the transaction level.

    The Departments of Agriculture, Defense, Homeland Security, Justice,
    Transportation, and Treasury, the National Aeronautics and Space
    Administration, and the Small Business Administration.

    Page 15 GAO-06-970 FFMIA Fiscal Year 2005 Results

      Figure 4: Auditors' Assessments of Substantial Compliance with FFMIA's Three
                       Requirements for Fiscal Years 1997 through

    While substantially more CFO Act agencies have obtained clean or
    unqualified audit opinions on their financial statements, we are concerned
    over the number of CFO Act agencies that have restated certain of their
    financial statements. As we have previously reported,26 a number of CFO
    Act agencies have restated certain of their financial statements over the

    26GAO, Financial Audit: Restatements to the Department of State's Fiscal
    Year 2003 Financial Statements, GAO-05-814R (Washington, D.C.: Sept. 20,
    2005); Financial Audit: Restatements to the Nuclear Regulatory
    Commission's Fiscal Year 2003 Financial Statements, GAO-06-30R
    (Washington, D.C.: Oct. 27, 2005) ; Financial Audit: Restatements to the
    General Services Administration's Fiscal Year 2003 Financial Statements,
    GAO-06-70R (Washington, D.C.: Dec. 6, 2005); Financial Audit: Restatements
    to the National Science Foundation's Fiscal Year 2003 Financial
    Statements, GAO-06-229R (Washington, D.C.: Dec. 22, 2005); and Financial
    Audit: Restatements to the Department of Agriculture's Fiscal Year 2003
    Financial Statements, GAO-06-254R (Washington, D.C.: Jan. 26, 2006).

    past few years to correct for material errors. Errors in financial
    statements result from mathematical mistakes, mistakes in the application
    of accounting principles, or oversight or misuse of facts that existed at
    the time the financial statements were prepared. Generally, these
    restatements resulted from weaknesses in internal control over the
    processing and reporting of certain transactions and inadequate audit
    procedures to detect these errors. The auditors for the seven agencies
    that restated their financial statements in fiscal year 2005 also reported
    that the agencies' financial systems had not met FFMIA requirements.
    Further, restatements raise questions about the reliability of other
    information in previously issued financial statements and indicate a
    continuing lack of improvement in the underlying agency financial systems.
    Frequent restatements to correct errors can undermine public trust and
    confidence in both the entity and all responsible parties.

        Auditors Mostly Provide Negative Assurance on FFMIA Compliance

    In fiscal year 2005, auditors for five agencies (Commerce, EPA, NSF, OPM,
    and SSA) provided negative assurance that the agencies' systems were
    compliant with FFMIA requirements. The auditor for one agency, Labor,
    provided positive assurance on FFMIA compliance. From our perspective,
    FFMIA requires auditors to provide positive assurance, which is an
    opinion, because section 803 (b)(1) of FFMIA requires auditors to "report
    whether the agency financial management systems comply with the
    requirements of [the act]." Auditors provide negative assurance when they
    state that nothing came to their attention during the course of their
    planned procedures to indicate that the agency's financial management
    systems did not meet FFMIA requirements. Under generally accepted
    government auditing standards, there are no requirements to perform
    additional testing beyond that needed for a financial statement audit for
    an auditor to give negative assurance. However, if financial statement
    users are not familiar with the concept of negative assurance, which we
    believe is generally the case, they may incorrectly assume that these five
    agencies' systems have been fully tested by the auditors and that the
    agencies have achieved FFMIA compliance. In addition, testing that is not
    sufficient to support an opinion also means that an area of noncompliance
    may be missed; therefore, the number of problems in a particular category
    may be even greater than auditors' reports of FFMIA noncompliance would
    suggest, because not all problems are being included. Although OMB's
    current audit guidance27 instructs auditors to test for compliance with

    27OMB Bulletin No. 06-03, Audit Requirements for Federal Financial
    Statements (Aug. 23, 2006).

    Page 17 GAO-06-970 FFMIA Fiscal Year 2005 Results

    FFMIA, it does not provide guidance on the nature and extent of tests to
    be performed. It only calls for auditors to provide negative assurance
    when reporting whether an agency's systems are in substantial compliance
    with the three FFMIA requirements. We did note greater attention to
    assessing FFMIA compliance at the agencies we visited. Auditors at 8 of
    the 12 CFO Act agencies visited prepared and used a separate audit program
    to assess FFMIA compliance. Auditors stated that separate FFMIA audit
    programs were developed to ensure consistency and to share best practices
    among their audit teams.

    In fiscal years 2005 and 2004, auditors for Labor provided positive
    assurance of Labor's financial management systems' compliance with FFMIA
    requirements. For both years, Labor's Inspector General contracted with an
    independent public accounting firm to conduct the financial statement
    audit and included a provision to specifically perform an FFMIA
    examination in accordance with American Institute of Certified Public
    Accountants attestation standards.28 In general, providing positive
    assurance of FFMIA compliance requires auditors to perform more audit
    procedures than those needed to render an opinion on the financial
    statements. While financial statement audits in general will offer some
    assurance on FFMIA compliance, auditors should also design and implement
    additional testing to satisfy the criteria in FFMIA. For example, in
    performing financial statement audits, auditors generally focus on the
    capability of the financial management systems to process and summarize
    financial information that flows into agency financial statements. In
    contrast, assessing FFMIA compliance involves determining whether an
    agency's financial management systems comply with systems requirements. To
    do this, auditors need to consider whether agency systems provide
    complete, accurate, and timely information for managing day-to-day
    operations. For fiscal year 2005, Labor's independent auditor performed
    transaction testing, provided FAM Section 700 training to audit team
    members, analyzed whether financial management systems provided reliable
    and timely financial information for managing current operations to senior
    management and program managers, and completed the audit procedures
    provided in FAM 701A and associated Joint Financial Management Improvement
    Program (JFMIP) checklists for each operating

    Generally accepted government auditing standards incorporate the American
    Institute of Certified Public Accountants (AICPA) general standard on
    criteria, its field work standards, and its reporting standards for
    attestation engagements, as well as the AICPA Statements on Standards for
    Attestation Engagements, unless the Comptroller General of the United
    States excludes them by formal announcement.

    Page 18 GAO-06-970 FFMIA Fiscal Year 2005 Results

    division. The auditor estimated that the cost of the additional procedures
    needed to provide positive assurance was between $50,000 and $80,000. The
    efforts of Labor to perform the level of review necessary to provide
    positive assurance of FFMIA compliance in fiscal years 2005 and 2004 are
    noteworthy, and we look forward to other agencies adopting similar
    auditing and reporting practices.

    Performing audit procedures designed to provide positive assurance of an
    agency's financial management systems' compliance with FFMIA requirements
    can identify weaknesses and lead to improvements that enhance the
    performance, productivity, and efficiency of federal financial management
    systems. It also provides a clear "bottom line," whereas negative
    assurance does not. Therefore, as we have discussed in prior reports
    covering fiscal years 2000 through 2004,29 we continue to believe that our
    prior recommendation for OMB to require agency auditors to provide a
    statement of positive assurance when reporting an agency's systems to be
    in substantial compliance with the three FFMIA systems requirements is
    still appropriate. Given OMB's explicit instruction to provide negative
    assurance, some auditors also indicated that a change in OMB's guidance on
    FFMIA reporting would be necessary in order for them to provide an opinion
    on FFMIA compliance.

    In a recent discussion with OMB officials, as well as OMB's comments on a
    draft of this report and our prior FFMIA reports, OMB continues to support
    the requirement for negative assurance of FFMIA compliance. While OMB
    agrees that testing should occur, and its guidance on FFMIA calls for it,
    it does not specify the nature and extent of audit procedures. OMB
    officials continue to express the belief that the level of testing needed
    for positive assurance may be too time-consuming and costly. OMB officials
    said that different, more coordinated approaches toward assessing an
    agency's internal controls and FFMIA compliance could provide sufficient
    assurance on an agency's systems. We share concerns about the added cost,
    but want to make our view quite clear that the focus needs to be on the
    ultimate end goal of having financial management

    GAO, Financial Management: FFMIA Implementation Critical for Federal
    Accountability, GAO-02-29 (Washington, D.C.: Oct. 1, 2001); Financial
    Management: FFMIA Implementation Necessary to Achieve Accountability,
    GAO-03-31 (Washington, D.C.: Oct. 1, 2002); Financial Management:
    Sustained Efforts Needed to Achieve FFMIA Accountability, GAO-03-1062
    (Washington, D.C.: Sept. 30, 2003); Financial Management: Improved
    Financial Systems Are Key to FFMIA Compliance, GAO-05-20 (Washington,
    D.C.: Oct. 1, 2004); and Financial Management: Achieving FFMIA Compliance
    Continues to Challenge Agencies, GAO-05-881 (Washington, D.C.: Sept. 20,
    2005).

    systems able to routinely produce reliable, useful, and timely financial
    information. Until such systems exist, the ability of federal managers to
    effectively manage and oversee their major programs was and continues to
    be restricted.

    In its comments, OMB emphasized that its PMA and financial management line
    of business initiatives, along with the strengthened internal control
    requirements incorporated into the revised OMB Circular No. A-123, are
    helping agencies to identify and correct FFMIA deficiencies. We agree
    these initiatives can drive systems improvements and support OMB's
    leadership in this area. Our concern lies in the fact that the full value
    of independent auditors' assessments of FFMIA compliance will not be fully
    realized until auditors perform a sufficient level of audit work to be
    able to provide positive assurance that agencies are in compliance with
    FFMIA as called for in the act. When reporting an agency's financial
    management systems to be in substantial compliance, positive assurance
    from independent auditors will provide users with confidence that the
    agency systems provide the reliable, useful, and timely information
    envisioned by the act.

                            Additional FFMIA Guidance Needed

    As we have previously reported, a number of auditors we interviewed
    expressed a need for clarification on the definition of "substantial
    compliance." In fiscal year 2005, auditors for 7 of the 12 agencies we
    visited stated that additional guidance on the definition of substantial
    compliance would be useful. As a result, we reiterate our previous
    recommendation that OMB explore clarifying the definition of "substantial
    compliance" to meet the needs of the auditing community and to allow for
    consistent application of the doctrine.

    In addition, 8 of the 12 independent auditors cited a need for additional
    guidance to assist them in assessing whether agency systems substantially
    comply with the three FFMIA requirements. For example, at SSA, the
    auditors reported a need for clearer guidance from OMB on assessing FFMIA
    compliance that is consistent with the GAO/PCIE FAM. Auditors for other
    agencies we visited professed a need for (1) more clearly defined and
    objective criteria to assist in their determination of FFMIA compliance,
    (2) more specific guidance on testing and sampling methodologies, and (3)
    additional guidance for assessing compliance with certain accounting
    standards, such as the Statement of Federal Financial Accounting Standards
    (SFFAS) No. 4, Managerial Cost Accounting Concepts and Standards for the
    Federal Government. In its comments, OMB stated that its growing
    experience helping agencies implement the PMA enables it to refine the
    existing FFMIA indicators associated with substantial compliance.
    Accordingly, OMB said it would consider our recommendation in any future
    policy and guidance updates.

    Reasons for Noncompliance

    Audit reports for the 18 agencies reported to have systems not
    in substantial compliance with one or more of FFMIA's three
    requirements during fiscal year 2005, again identified the same six
    primary reasons for noncompliant agency systems. They ranged from serious,
    pervasive systems problems to less serious problems that may affect only
    one aspect of an agency's accounting operation:

         o nonintegrated financial management systems,
         o inadequate reconciliation procedures,
         o lack of accurate and timely recording of financial information,
         o noncompliance with the SGL,
         o lack of adherence to federal accounting standards, and
         o weak security controls over information systems.

    Figure 5 shows the relative frequency of these problems at the agencies
    reported to have noncompliant systems. The same six types of problems have
    been cited by auditors in the fiscal years 2001 through 2004 audit
    reports, although the auditors may not have reported these problems as
    specific reasons for their systems' lack of substantial compliance with
    the three FFMIA requirements. In addition, we caution that the occurrence
    of problems in any particular category may be even greater than auditors'
    reports of FFMIA noncompliance would suggest because auditors may not have
    identified all problems during the reviews.

    Figure 5: Problems Reported by Auditors for Fiscal Years 2001 through 2005

    Nonintegrated Financial Management Systems

    The CFO Act calls for agencies to develop and maintain integrated
    accounting and financial management systems30 that comply with federal
    systems requirements and provide for (1) complete, reliable, consistent,
    and timely information that is responsive to the financial information
    needs of the agency and facilitates the systematic measurement of
    performance; (2) the development and reporting of cost management
    information; and (3) the integration of accounting, budgeting, and program
    information. OMB Circular No. A-127, Financial Management Systems,
    requires agencies to establish and maintain a single integrated financial
    management system that conforms to functional requirements issued by the
    Financial Systems Integration Office (FSIO),31 formerly the Joint
    Financial Management Improvement Program (JFMIP). More details on the
    financial management systems requirements can be found in appendixes I and
    II.

    The lack of integrated financial management systems typically results in
    agencies expending major effort and resources, including in some cases
    hiring external consultants, to develop information that their systems
    should be able to provide on a daily or recurring basis. Agencies with
    nonintegrated financial systems are also more likely to devote more time
    and resources to collecting information than those with integrated
    systems. In addition, opportunities for errors are increased when
    agencies' systems are not integrated.

    Auditors frequently mentioned the lack of integrated financial management
    systems in their fiscal year 2005 audit reports. As shown in figure 5,
    auditors for 13 of the 18 agencies with noncompliant systems reported this
    to be a problem, compared with 12 of the 16 agencies reported with
    noncompliant systems in fiscal year 2004. For example,

    30

    Federal financial system requirements define an integrated financial
    system as one that coordinates a number of previously unconnected
    functions to improve overall efficiency and control. Characteristics of
    such a system include (1) standard data classifications for recording
    financial events; (2) common processes for processing similar
    transactions; (3) consistent control over data entry, transaction
    processing, and reporting; and (4) a system design that eliminates
    unnecessary duplication of transaction entry. OMB Circular No. A127,
    Financial Management Systems, paragraph 7(b) (Revised Dec. 1, 2004).

    31

    The FSIO was formerly known as the Joint Financial Management Improvement
    Program (JFMIP) staff office. In December 2004, the JFMIP Principals voted
    to modify the roles and responsibilities of the JFMIP Program Office, now
    FSIO. The FSIO Executive reports to OMB's Office of Federal Financial
    Management Controller. See OMB, Update on the Financial Management Line of
    Business and the Financial Systems Integration Office, Memorandum
    (Washington, D.C.: Dec. 16, 2005).

    auditors for the Department of Housing and Urban Development (HUD)
    reported that HUD has not been in compliance with FFMIA, in part due to
    the lack of an integrated financial management system, since fiscal year
    1997, when reports under the act were first required. As a result, HUD has
    had to rely on extensive ad hoc analyses and special projects to produce
    account balances and disclosures. The auditors further reported that HUD's
    most significant system challenges exist at the Federal Housing
    Administration (FHA), which continues to conduct some day-to-day business
    operations with legacy-based systems, thereby limiting its ability to
    integrate the financial processing environment, although the auditors
    noted that FHA is making progress in achieving compliance with federal
    financial system requirements. Consequently, according to the HUD Office
    of Inspector General, since HUD's existing core financial system could be
    better integrated, more user-friendly, and less costly to maintain, HUD
    management is proceeding with plans to develop and implement a modern
    financial management system through the HUD Integrated Financial
    Management Improvement Project.

    At DHS, auditors reported that the financial management systems for
    Immigration and Customs Enforcement (ICE) and the U.S. Coast Guard lack
    appropriate integration. Specifically, DHS auditors reported that ICE had
    not successfully integrated the accounting processes of the five DHS
    components for which it became responsible in fiscal year 2004. Auditors
    also noted that ICE continued to operate unreliable processes and
    procedures that support accounting and financial reporting, resulting in
    material errors, irregularities, and abnormal balances in the DHS
    consolidated financial statements that existed for most of fiscal year
    2004 and continued unresolved in fiscal year 2005. As a result, auditors
    reported that ICE's financial systems were inadequate to process financial
    transactions for the five DHS components. Further, auditors for the Coast
    Guard reported that the financial reporting process was complex and
    labor-intensive with a significant number of adjustments being made
    outside the core accounting system. In addition, Coast Guard officials had
    to perform a significant amount of manual review in order to integrate
    data from three separate general ledger systems. As a result, the auditors
    found that DHS was unable to prepare a consolidated financial statement
    for fiscal year 2005 until November 2005 and that the consolidated
    financial statement disclosures and notes contained critical errors and
    inconsistencies that required material adjustments to correct.

    Inadequate Reconciliation Procedures

    A reconciliation process, whether manual or automated, is a necessary and
    valuable part of a sound financial management system. The less integrated
    the financial management system, the greater the need for adequate
    reconciliations because data are being accumulated from a number of
    different sources. Reconciliations are needed to ensure that data have
    been recorded properly between the various systems and manual records. The
    Comptroller General's Standards for Internal Control in the Federal
    Government highlight reconciliation as a key control activity.

    As shown in figure 5, auditors for 14 of the 18 agencies with noncompliant
    systems reported that the agencies had reconciliation problems, including
    a number of agencies that could not reconcile their Fund Balance with
    Treasury (FBWT) accounts with the Department of the Treasury's (Treasury)
    records, compared with 11 of the 16 agencies reported with noncompliant
    systems in fiscal year 2004. Treasury policy requires agencies to
    reconcile their accounting records with Treasury records monthly
    (comparable to individuals reconciling their personal checkbooks to their
    monthly bank statements).

    As a case in point, in fiscal year 2005, the auditor for GSA reported
    instances of improper reconciliation procedures that contributed to errors
    in financial reporting. Specifically, the auditor noted that differences
    between budgetary account balances in various GSA subsystems and the core
    financial management system had not been reconciled, nor had proper
    budgetary account reconciliation procedures been developed. These
    weaknesses inhibit GSA management's ability to detect and prevent
    budgetary accounting and reporting misstatements. Further, the auditors
    noted that GSA continued to lack adequate controls for reconciling
    intragovernmental balances. As a result, GSA has developed extensive
    manual workarounds and used estimates to determine the break down of
    revenue and receivables for DOD-the largest customer of GSA's Federal
    Acquisition Service. For example, as of June 30, 2005, GSA was unable to
    assign $582 million in unidentified receivable transactions to a specific
    department within DOD and therefore simply allocated this difference among
    the Department of the Army, Department of the Navy, and the Department of
    the Air Force. Proper reconciliation procedures would allow GSA to resolve
    these types of unidentified transactions, identify material out-of-balance
    conditions between federal entities, assist in the preparation of
    governmentwide financial statements, help ensure that intra-governmental
    balances are properly eliminated in the governmentwide financial
    statements, and provide some level of assurance that balances have been
    accurately and appropriately recorded.

    Lack of Accurate and Timely Recording of Financial Information

    As shown in figure 5, auditors for 17 of 18 agencies with noncompliant
    systems reported the lack of accurate and timely recording of financial
    information as a problem for fiscal year 2005, compared with 16 of 16
    agencies reported with noncompliant systems in fiscal year 2004. Accurate
    and timely recording of financial information is essential for successful
    financial management. Timely recording of transactions facilitates
    accurate reporting in agencies' financial reports and other management
    reports used to guide managerial decision making. In addition, having
    systems that record information in an accurate and timely manner is
    critical for key governmentwide initiatives, such as integrating budget
    and performance information.

    In contrast, lack of timely recording of transactions during the fiscal
    year can result in agencies making substantial efforts at fiscal year-end
    to perform extensive manual financial statement preparation efforts that
    are susceptible to error and increase the risk of misstatements. For
    example, auditors for the Department of Health and Human Services (HHS)
    noted that one of the monthly reports prepared by the Program Support
    Center to reconcile the general ledger with Treasury's records has lost
    its usefulness due to old and invalid items that remain in the general
    ledger. Specifically, they identified differences with an absolute value
    of approximately $5.5 billion, in part due to transactions dating back to
    as early as 1993. In addition, the auditors noted that 53 of 105
    reconciliations selected for review were not completed within HHS's
    allotted 30-day deadline-several taking up to 84 days to complete.
    Finally, the auditors identified more than 32,000 grants with net
    obligation balances of approximately $2.3 billion that were eligible to be
    closed. Many of those grants have been eligible for closure for several
    years. As a result of these and other problems, more than 270 entries with
    an absolute value of more than $208 billion were recorded outside the
    general ledger system. The auditors noted that the majority of these
    entries could have been eliminated by more timely analyses and
    reconciliations, as well as improved estimation methodologies.

    Noncompliance with the SGL

    As shown in figure 5, auditors for 11 of the 18 agencies with noncompliant
    systems reported that the agencies' systems did not comply with SGL
    requirements for fiscal year 2005, compared with 11 of the 16 agencies
    reported with noncompliant systems in fiscal year 2004. FFMIA specifically
    requires federal agencies to implement the SGL at the transaction level.
    Using the SGL promotes consistency in financial transaction processing and
    reporting by providing a uniform chart of accounts and pro forma
    transactions and provides a basis for comparison at the agency and
    governmentwide levels. The defined accounts and pro
    forma transactions standardize the accumulation of agency financial
    information as well as enhance financial control and support financial
    statement preparation and other external reporting.

    A lack of adherence to the SGL impedes the ability of the federal
    government to complete accurate, governmentwide financial statements. For
    example, auditors for the Small Business Administration (SBA) noted that
    certain accounting transactions were not recorded, processed, summarized,
    or reported in accordance with the SGL. Specifically, the auditors found
    that the SBA used improper rules to record a transaction, resulting in a
    subsidy account having a zero balance, while an expense account was
    misstated by $58 million. SBA also incorrectly characterized $30.5 million
    as a decrease in borrowing authority instead of an actual repayment of
    debt. Finally, the department used improper posting logic in preparing
    budget pro forma data, resulting in various overstatements and
    understatements totaling $24.2 million.

    Moreover, by not implementing the SGL, agencies may experience
    difficulties in providing consistent financial information across their
    components and functions. For example, auditors for the Department of
    Justice (DOJ) found that DOJ does not substantially comply with the SGL,
    in part due to noncompliance issues at the Federal Bureau of Investigation
    (FBI) and the United States Marshals Service (USMS). Specifically, the
    auditors noted that the FBI's financial management systems do not permit
    use of the SGL at the transaction level, in that certain transactions are
    processed outside of the core system and then must be recorded into the
    core system through a manual or automated batch transaction process.
    Further, USMS does not maintain transaction-level detail for upward and
    downward adjustments of prior-year undelivered orders and does not use an
    appropriate liability account, as called for by the SGL.

    Lack of Adherence to Federal Accounting Standards

    One of FFMIA's requirements is that agencies' financial management systems
    account for transactions in accordance with federal accounting standards;
    however, agencies continue to face significant challenges in implementing
    these standards. As shown in figure 5, auditors for 11 of the 18 agencies
    with noncompliant systems reported that these agencies had problems
    complying with one or more federal accounting standards for fiscal year
    2005, compared with 11 of the 16 agencies reported with noncompliant
    systems in fiscal year 2004. Appendixes III and IV list the federal
    financial accounting standards and other guidance issued by the Federal
    Accounting Standards Advisory Board and its Accounting and Auditing Policy
    Committee, respectively. The purpose of these standards and other guidance
    is to ensure that federal agencies' financial reports provide users with
    understandable, relevant, and reliable information about the financial
    position, activities, and results of operations of the U.S. government and
    its components.

    Auditors expressly reported compliance problems with 11 specific
    accounting standards in fiscal year 2005. Of those standards, the 3 that
    were most troublesome for agencies were SFFAS No. 1, Accounting for
    Selected Assets and Liabilities; SFFAS No. 4, Managerial Cost Accounting
    Concepts and Standards for the Federal Government; and SFFAS No. 6,
    Accounting for Property, Plant, and Equipment. In particular, SFFAS No. 4,
    which became effective in 1998 and requires the use of managerial cost
    accounting information in the decision-making process, continues to be
    difficult for federal managers to fully implement. As we recently
    reported,32 the Department of Transportation (DOT) has in recent years
    shown strong leadership in developing managerial cost accounting systems
    both departmentwide and at the individual component agencies. For example,
    according to DOT officials, the Federal Aviation Administration-DOT's
    largest component agency-has completed the initial implementation of a
    managerial cost accounting system. Several other DOT component agencies
    are also implementing detailed costing and billing systems to meet their
    cost accounting needs. However, DOT management reported that it will be
    several years before cost accounting data systems are fully mature and
    include historical data that will allow DOT managers to integrate
    performance and accounting information. As a result, DOT managers will not
    know the full costs associated with their programs and activities, which
    could impair their decision-making abilities.

    Accurate and timely cost management information is critical for federal
    managers to transform how government agencies manage the business of
    government and vital in developing meaningful links between budget,
    accounting, and performance. Starting in July 2005, we performed a series

    GAO, Managerial Cost Accounting Practices: Departments of Education,
    Transportation, and the Treasury, GAO-06-301R (Washington, D.C.: Dec. 19,
    2005).

    Page 28 GAO-06-970 FFMIA Fiscal Year 2005 Results

    of congressional briefings and issued corresponding reports33 concerning
    the status of managerial cost accounting activities at several large
    federal agencies, including Labor, Education, HHS, DOT, SSA, Treasury, and
    Veterans Affairs (VA). We found that generally these agencies have
    experienced uneven success in the implementation of managerial cost
    accounting and that managerial cost accounting-related internal controls
    within the agencies need to be strengthened. We also identified strong
    upper-level management support and leadership as a key component in the
    successful implementation of managerial cost accounting and promotion of
    managerial cost accounting information departmentwide.

    Weak Security Controls over Information Systems

    Information security weaknesses are a major concern for federal agencies
    and the general public and one of the frequently cited reasons for
    noncompliance with FFMIA. As shown in figure 5, auditors for 16 of the 18
    agencies with noncompliant systems reported security weaknesses in
    information systems to be a problem, compared with 15 of the 16 agencies
    reported with noncompliant systems in fiscal year 2004. These control
    weaknesses place vast amounts of government assets at risk of inadvertent
    or deliberate misuse, financial information at risk of unauthorized
    modification or destruction, sensitive information at risk of
    inappropriate disclosure, and critical operations at risk of disruption.
    Since 1997, we have considered information security to be high-risk area
    at a governmentwide level.

    For example, the Department of Agriculture (Agriculture) and its component
    agencies accelerated their efforts during fiscal year 2005 to comply with
    the federal information security requirements; however, even though
    progress was made, the auditors noted that several material security
    weaknesses still exist. The weaknesses identified include an unreliable
    certification and accreditation process and ineffective controls in the
    general control environment, as well as weaknesses in controls over
    physical and logical access, inventory of systems and network equipment,

    33

    GAO, Managerial Cost Accounting Practices: Leadership and Internal
    Controls Are Key to Successful Implementation, GAO-05-1013R (Washington,
    D.C.: Sept. 2, 2005); Managerial Cost Accounting Practices: Departments of
    Labor and Veterans Affairs, GAO-05-1031T (Washington, D.C.: Sept. 21,
    2005); Managerial Cost Accounting Practices: Departments of Education,
    Transportation, and the Treasury, GAO-06-301R (Washington, D.C.: Dec. 19,
    2005); and Managerial Cost Accounting Practices: Department of Health and
    Human Services and Social Security Administration, GAO-06-599R
    (Washington, D.C.: Apr. 18, 2006).

    effective policies and procedures, and vulnerability scanning34 and
    mitigation. The auditors noted that these departmental weaknesses have a
    significant impact on the integrity, confidentiality, and availability of
    systems and data.

    The recent information security breaches at Agriculture, VA, and other
    agencies compromised the personal data of millions of U.S. citizens and
    highlighted the importance of adequate system security policies and
    programs. Robust federal security programs are critically important to
    properly protect personal and financial information and the privacy of
    individuals. On June 20, 2006, we reported35 on a number of actions that
    agencies can take to help guard against the possibility that databases of
    personally identifiable information are inadvertently compromised. We
    noted that a key step is to develop a privacy impact assessment-an
    analysis of how personal information is collected, stored, shared, and
    managed-whenever information technology is used to process personal
    information. In addition, agencies can take more specific practical
    measures aimed at preventing data breaches, including limiting the
    collection of personal information, limiting the time that these data are
    retained, limiting access to personal information and training personnel
    accordingly, and considering the use of technological controls, such as
    encryption, when data need to be stored on portable devices. On June 23,
    2006, OMB issued a memorandum36 focusing on the protection of information
    that is being accessed remotely or physically transported outside an
    agency's secured location. Federal agencies are required to implement
    guidance developed by the National Institute of Standards and Technology
    for the protection of remote information. In addition, OMB recommends that
    all agencies implement additional safeguards, including data encryption
    and proper user authentication procedures for the remote access of data.

    34

    A vulnerability is the existence of a flaw or weakness in hardware or
    software that can be exploited resulting in a violation of an implicit or
    explicit security policy. Vulnerability scanners are software applications
    that can be used to identify vulnerabilities on computer hosts and
    networks.

    35GAO, Information Security: Leadership Needed to Address Weaknesses and
    Privacy Issues at Veterans Affairs, GAO-06-897T (Washington, D.C.: June
    20, 2006).

    36

    OMB, Protection of Sensitive Agency Information, M-06-16 (Washington,
    D.C.: June 23, 2006).

    Unresolved information security weaknesses can also compromise the
    reliability and availability of data recorded in or transmitted by an
    agency's financial management system. As a case in point, in fiscal year
    2005, auditors for Treasury noted that the general controls over the
    department's computer systems did not effectively prevent unauthorized
    access to and disclosure of sensitive information, unauthorized changes to
    systems and application software, and unauthorized access to programs and
    files that control computer hardware and secure applications. In
    particular, weaknesses we reported37 in information security controls at
    the Internal Revenue Service (IRS) could result in unauthorized
    individuals being able to access, alter, or abuse proprietary IRS programs
    and electronic data and taxpayer information. The auditors noted that a
    key reason for Treasury's information security weaknesses was that the
    department had not yet fully implemented an agencywide information
    security program to ensure that controls were effectively established and
    maintained. They further reported that Treasury's information security
    programs and practices needed additional improvements to adequately
    protect the information systems that support the department's operations.

      Federal Financial Management System Initiatives Continue to Evolve

    Agencies have a number of efforts under way to address their existing
    financial management systems problems. Recent efforts to modernize
    financial management systems have often exceeded budgeted costs, resulted
    in delays in delivery dates, and not provided the anticipated system
    functionality and performance. The key for federal agencies to avoid the
    long-standing problems that have plagued financial management system
    improvement efforts is to address the foremost causes of those problems
    and adopt solutions that reduce the risks associated with these efforts to
    acceptable levels. Our March 2006 report38 discusses in detail the key
    causes of past financial management system implementation failures, the
    significant governmentwide initiatives currently under way, and actions
    that can be taken to improve the management and control of agency
    financial management system modernization efforts. The report also
    highlights some of the issues we identified with OMB's financial
    management line of business initiative and includes actions that would
    help reduce the risks associated with financial management system

    37

    GAO, Tax Administration: IRS Improved Some Filing Season Services, but
    Long-term Goals Would Help Manage Strategic Trade-offs , GAO-06-51
    (Washington, D.C.: Nov. 14, 2005).

    38

    GAO-06-184.

    Page 31 GAO-06-970 FFMIA Fiscal Year 2005 Results

    implementation efforts. In a related initiative, OMB established the FSIO
    to address some of the responsibilities of the former JFMIP Program
    Management Office, which was realigned in December 2004. OMB will provide
    oversight and guidance to FSIO on priorities and expected performance, in
    consultation with the FSIO Transformation Team of the CFO Council.
    Further, OMB's December 2004 revision of Circular No. A123, Management's
    Responsibility for Internal Control, which was effective for fiscal year
    2006, is intended to strengthen requirements for conducting management's
    assessment of internal control over financial reporting. Through these
    various initiatives, OMB is taking action to improve financial management
    in the federal government. However, establishing good financial management
    throughout the federal government will also require changing the
    organizational culture of some federal agencies; therefore, the sustained
    leadership and support of the Congress has been and continues to be
    essential to the reform of financial management in the federal government.

        Adherence to Best Practices Is Critical to Successful Modernization
        Initiatives

    Across government, agencies have many efforts under way to implement new
    financial management systems or to upgrade existing systems that may help
    improve FFMIA compliance. However, these efforts far too often result in
    systems that do not meet their cost, schedule, and performance goals.
    While agencies anticipate that the new systems will provide reliable,
    useful, and timely data to support managerial decision making, our work
    and that of others has shown that has often not been the case. For
    example, modernization efforts at Energy, HHS, DOD, and Treasury have been
    hampered by agencies not following best practices in systems development
    and implementation efforts (commonly referred to as disciplined
    processes).

    o  According to Energy's independent auditor,39 Energy implemented a new
    financial accounting system in April 2005, shortly after reorganizing and
    consolidating its finance and accounting services organization in October
    2004. At the same time, Energy also adopted a new chart of accounts in
    conjunction with the new accounting system. Prior to 2005, Energy's
    auditors had consistently provided negative assurance that the financial
    management systems were in compliance with FFMIA; however, the
    reorganization and consolidation adversely affected the financial
    accounting staffing levels and skills mix

    39

    KPMG, Independent Auditor's Report (Washington, D.C.: Nov. 9, 2005).

    throughout the department and Energy did not complete corrective actions
    to address these weaknesses. As a result, in the process of implementing
    the new system, Energy encountered a number of problems involving data
    conversion, reconciliation, posting, and reporting. Energy's auditor
    specifically noted problems in accounting for obligations, monitoring
    budget execution and control, reconciling integrated contractor trial
    balances with departmental records, reconciling accounting system modules
    to the general ledger, resolving various posting errors, and identifying
    and reporting intragovernmental transactions. The auditor also noted that,
    after the implementation of the new system, many reports needed for
    management, internal control, and audit purposes were no longer available.
    These problems hindered the department's ability to assure the accuracy
    and completeness of data needed for audit testing and it was unable to
    provide the accurate and supportable financial statements required for
    audit. As a result, Energy's auditors issued a disclaimer on the fiscal
    year 2005 financial statements and concluded that the financial management
    systems did not substantially comply with federal financial management
    systems requirements and federal accounting standards.

    o  As part of its modernization effort, HHS developed plans to reduce the
    number of financial management systems from five to two using the Unified
    Financial Management System (UFMS). This system is expected to integrate
    the HHS financial management structure to provide more timely and
    consistent information and to promote the consolidation of accounting
    services throughout HHS. On the basis of our fiscal year 2004 review of
    UFMS,40 we reported that HHS had not effectively implemented the best
    practices needed to reduce the risks associated with the implementation of
    a new system. Specifically, we reported that the UFMS implementation
    project was schedule driven rather than event driven based on effectively
    implemented disciplined processes, with limited time devoted to critical
    steps in the system development life cycle. We also stated that data
    conversion and system interface challenges were critical to the ultimate
    success of UFMS. In April 2005, HHS deployed the core financial portion of
    UFMS at the Centers for Disease Control and Prevention (CDC) and the Food
    and Drug Administration (FDA). Subsequently, auditors at HHS reported

    GAO, Financial Management Systems: Lack of Disciplined Processes Puts
    Implementation of HHS' Financial System at Risk, GAO-04-1008 (Washington,
    D.C.: Sept. 23, 2004).

    Page 33 GAO-06-970 FFMIA Fiscal Year 2005 Results

    problems with the implementation process at CDC and FDA.41 Specifically,
    they stated that HHS experienced significant challenges in resolving
    issues with the system conversion and implementation, including
    configuration issues, insufficient resources, inadequate training, and
    limited report capability of financial and budget activity within the
    system. Furthermore, the auditors noted that UFMS, as currently
    configured, cannot produce financial statements. Therefore, FDA and CDC
    used cumbersome processes to crosswalk the unadjusted trial balance to the
    financial statements and to record thousands of nonstandard accounting
    entries both prior and subsequent to the UFMS conversion. For example, FDA
    recorded about 14,000 nonstandard accounting entries totaling an absolute
    value of approximately $9.4 billion to create the September 30, 2005,
    financial statements. In addition, CDC had to record (1) accounting
    entries totaling an absolute value of approximately $11.3 billion either
    to its financial statements or those of another HHS operating division;

    (2) adjustments totaling an absolute value of about $24.4 billion, related
    to conversion, data cleanup, corrections, account reclassifications, and
    other adjustments to conform to UFMS processing; and (3) an approximately
    $19.1 billion absolute value adjustment to the database used to generate
    financial statements as a result of conversion adjustments made in UFMS
    that could not be extracted into the database. The auditors reported that
    HHS management continues to develop and implement corrective actions to
    improve its implementation of UFMS, develop internal controls, train
    personnel, and develop necessary reports, policies, and procedures;
    however, they noted that sustained efforts will be necessary to overcome
    the seriousness of the weaknesses noted.

    o  According to DOD management, the department's inability to comply
    materially with FFMIA is primarily the result of structural problems
    related to legacy accounting systems that do not accurately account for
    both budgetary and proprietary activities.42 Quite simply, according to
    DOD management, the department does not have the systems and accounting
    structures in place to achieve compliance with FFMIA. We have reported
    that DOD has historically been unable to develop and implement business
    systems on time, within budget, and with the

    41

    Ernst & Young, Report of Independent Auditors (Washington, D.C.: Nov. 11,
    2005).

    42

    Department of Defense, FY 2005 Performance and Accountability Report
    (Washington, D.C.: Nov. 15, 2005).

    Page 34 GAO-06-970 FFMIA Fiscal Year 2005 Results

    promised capability. For example, in September 2005, we reported43 that
    the Department of the Navy spent approximately $1 billion for four largely
    failed pilot Enterprise Resource Planning (ERP) system44 efforts, without
    marked improvement in its day-to-day operations. Although the pilots used
    the same ERP commercial off-the-shelf software, inconsistencies in the
    design and implementation resulted in them not being interoperable.
    Furthermore, if there had been effective project management oversight of
    the pilot programs at the outset, there would not have been a need to, in
    essence, start over. The Navy now has a new ERP project under way, which
    early Navy estimates indicate will cost another $800 million. While the
    new project, as currently envisioned, has the potential to address some of
    the Navy's financial management weaknesses, it will not provide an
    all-inclusive end-to-end corporate solution for the Navy. For example, the
    current scope of the ERP does not provide for real-time asset visibility
    of shipboard inventory, which has been and continues to be a long-standing
    problem within the department. Further, there are still significant
    challenges and risks ahead as the project moves forward, such as
    developing and implementing 44 system interfaces with other Navy and DOD
    systems and converting data from legacy systems to the ERP system. In
    addition, the Navy does not have in place the structure to capture
    quantitative data that can be used to assess the effectiveness of the
    overall effort and has not established an independent verification and
    validation function.

    o  The ability to prepare the consolidated financial statements of the
    U.S. government (CFS) has been a long-standing challenge for Treasury's
    Financial Management Service. To address some of the internal control
    weaknesses identified in our audit report,45 Treasury began developing the
    Governmentwide Financial Report System (GFRS). The goal of this new system
    is to directly link information from federal agencies' audited financial
    statements to amounts reported in the CFS. We

    43

    GAO, DOD Business Systems Modernization: Navy ERP Adherence to Best
    Business Practices Critical to Avoid Past Failures , GAO-05-858 (
    Washington, D.C.: Sept. 29, 2005).

    44

    An ERP solution is an automated system using commercial off-the-shelf
    software consisting of multiple, integrated functional modules that
    perform a variety of businessrelated tasks such as payroll, general ledger
    accounting, and supply chain management.

    45

    Department of the Treasury, 2005 Financial Report of the United States
    Government (Washington, D.C.: Dec. 2005).

    found46 that Treasury had not yet effectively implemented the disciplined
    processes necessary to provide reasonable assurance that GFRS will meet
    its performance, schedule, and cost goals. Specifically, Treasury had not
    (1) developed a concept of operations or any other document that
    adequately defines or documents the expected performance of GFRS, (2)
    developed a detailed project plan and schedule through completion of GFRS,
    (3) developed a budget justification for GFRS as called for in OMB
    Circular No. A-11,47 and

    (4) implemented the disciplined processes necessary to effectively manage
    the GFRS project. These deficiencies have contributed to the various
    usability problems encountered by its users. Going forward, it will be
    important for Treasury to better mitigate its risks so that longstanding
    internal control weaknesses regarding the preparation of the CFS can be
    eliminated and, more importantly, so that Treasury ends up with a system
    that fully meets its and agencies' needs.

    In addition to the examples above, our March 2006 report48 summarizes many
    of the agencies' financial management system implementation failures that
    have been previously reported by us and agency inspectors general. In our
    report, we identified several problems related to agencies' implementation
    of financial management systems in three recurring and overarching themes:
    disciplined processes, human capital management, and other information
    technology (IT) management practices. Key causes of failure within each
    area are identified in table 1. Although the implementation of any major
    system will never be a risk-free proposition, organizations that follow
    and effectively implement disciplined processes, along with effective
    human capital and other IT management practices, can reduce the risks of
    financial management system modernization efforts to acceptable levels.

    46

    GAO, Financial Management Systems: Lack of Disciplined Processes Puts
    Effective Implementation of Treasury's Governmentwide Financial Report
    System at Risk, GAO-06-413 (Washington, D.C.: Apr. 21, 2006).

    47

    Section 300 of OMB Circular No. A-11, Preparation, Submission, and
    Execution of the Budget (Nov. 2, 2005), set forth requirements for federal
    agencies for planning, budgeting, acquiring, and managing information
    technology capital assets.

    48GAO-06-184.

    Table 1: Key Causes of Systems Implementation Failure
                                     Human capital
    Disciplined processes      management                Other IT management
    Requirements management          Strategic workforce Enterprise
                                                   planning architecture
    Testing                    Human resources           Investment management
    Data conversion and system Change management         Information security
    interfaces
    Risk management
    Project management

                  Source: GAO analysis and inspectors general reports.

        Goals for the Financial Management Line of Business Have Been Established

    To help address financial management systems' weaknesses and
    implementation failures and to support the President's Management Agenda
    goal to expand electronic government, OMB launched the financial
    management line of business in March 2004. The financial management line
    of business was one of five original lines of business that were initiated
    to develop business-driven, common solutions for specific lines of
    business that extend across the entire federal government. OMB and
    designated agency lines of business task forces plan to use enterprise
    architecture-based principles and best practices to identify common
    solutions for business processes, technology-based shared services, or
    both, to be made available to government agencies. The original five lines
    of business were financial management, human resources management, grants,
    federal health architecture, and case management.49 These lines of
    business share similar business requirements and processes. In March 2005,
    OMB started a task force to address a sixth line of business on IT
    security. As introduced in the President's fiscal year 2007 budget
    proposal, three new lines of business initiatives will join the six
    existing lines of business. The three new lines of business are IT
    infrastructure optimization, geospatial, and budget formulation and
    execution.50

    49

    Case management involves managing claims or investigations including
    creating, routing, tracing, assigning and closing a case, as well as
    collaboration among case handlers.

    50

    In March 2006, OMB launched task forces to conduct governmentwide analysis
    for the three new lines of business based on an analysis of the fiscal
    year 2007 budget that shows significant opportunities for improvement in
    sharing common information technology infrastructure, geospatial data and
    capabilities, and budgeting processes and functions across government.

    The financial management line of business initiative promotes leveraging
    shared service solutions to enhance the government's performance and
    services, such as establishing shared service providers to consolidate
    financial management activities for major agencies. Under this initiative,
    OMB developed an approach for competitively migrating financial management
    systems to a limited number of shared service providers, including OMB
    designated federal shared service providers, or private sector entities.51
    As part of the fiscal year 2006 budget process, in February 2005 OMB
    designated four federal agencies52 as governmentwide financial management
    shared service providers. OMB evaluated business cases submitted by
    agencies using a due diligence checklist and selected the four agencies to
    be shared service providers. Three of the agencies have had significant
    experience providing financial management services to other small federal
    entities.

    OMB has indicated that other agencies may also serve as shared service
    providers in the future, but has not yet established any limits or targets
    on the number of providers to be designated. Although there have been
    subsequent requests by agencies and departments to become shared services
    providers, as of September 2006, OMB has not designated any new providers
    beyond the four original service providers previously selected. According
    to OMB's Migration Planning Guidance that was issued in September 2006,
    OMB has encouraged private sector providers that can satisfy the shared
    services requirements to participate in the procurement process for these
    services. Agencies are responsible for determining, through competition,
    if a private sector shared service provider meets the financial management
    line of business requirements. OMB officials told us they may consider the
    designation of these providers in the future.

    In a December 2005 memorandum53 to agency CFOs, OMB provided an update on
    the financial management line of business. The memorandum

    51

    OMB has not designated any private sector entities as shared service
    providers, but may consider doing so in the future.

    52

    The four agencies designated as shared service providers were the
    Department of the Interior (National Business Center), General Services
    Administration (Federal Integrated Solutions Center), Department of the
    Treasury (Bureau of the Public Debt's Administrative Resource Center), and
    Department of Transportation (Enterprise Services Center).

    53

    OMB, Update on the Financial Management Line of Business and the Financial
    Systems Integration Office, Memorandum (Washington, D.C.: Dec. 16, 2005).

    explained that the overall vision of the financial management line of
    business (as depicted in fig. 6) is to improve the cost, quality, and
    performance of financial management systems by leveraging shared service
    solutions and implementing other governmentwide reforms that foster
    efficiencies in federal financial operations. The memorandum also stated
    that the goals of the financial management line of business include

         o providing timely and accurate data for decision-making;
         o facilitating stronger internal controls that ensure integrity in
           accounting and other stewardship activities;
         o reducing costs by providing a competitive alternative for agencies to
           acquire, develop, implement, and operate financial management systems
           through shared service solutions;
         o standardizing systems, business processes, and data elements; and
         o providing for seamless data exchange between and among federal
           agencies by implementing a common language and structure for financial
           information and system interfaces.

    Figure 6: Overall Vision of the Financial Management Line of Business

                        Source: Office of Management and Budget.

    OMB stated, in the December 2005 memorandum, that federal agencies have
    begun implementing the financial management line of business initiative by
    actively migrating to shared service providers and initiating solutions to
    integrate financial data among and between agency business

    Page 40 GAO-06-970 FFMIA Fiscal Year 2005 Results

    systems. In August 2005, OPM was the first CFO Act agency to announce its
    plans to move to a designated shared service provider. In addition, in
    March 2006, Labor awarded a 5-year contract to a private sector firm to
    provide financial management hosting and operation and maintenance
    services, which includes hardware, software, and other services. As part
    of its best-value determination, EPA was also considering the designated
    shared service providers as well as private sector providers for software,
    integration, and hosting and plans to award its contract no later than the
    first quarter of fiscal year 2007. Moreover, DHS officials testified in
    March 2006,54 that rather than acquiring, configuring, and implementing a
    new system within DHS, they recognized the opportunity to leverage
    investments that have already been made, both within DHS and at
    OMBdesignated shared service providers.

    OMB noted that nothing in the December 2005 memorandum changes the
    expectations that agencies will continue to take all the necessary steps
    (in the earliest possible time frames) to meet the financial management
    line of business goals. OMB stated that it had instituted a policy that
    agencies seeking to modernize their financial systems must either be
    designated as a public shared service provider or must migrate to a shared
    service provider (public, private, or a combination of both). However,
    exceptions will be made in limited situations when an agency demonstrates
    compelling evidence of a best value and lower risk alternative. It is
    OMB's intent to avoid investments in "in-house" solutions wherever
    possible so that the shared service framework can fully achieve potential
    and anticipated returns.

        Challenges and Implications in Implementing the Financial Management Line of
        Business

    We have long supported and called for initiatives to standardize and
    streamline common systems, which can reduce costs and, if done correctly,
    improve accountability. Likewise, OMB has correctly recognized that
    enhancing the government's ability to implement financial management
    systems that are capable of providing accurate, reliable, and timely
    information on the results of operations needs to be addressed as a
    governmentwide solution, rather than individual agency stove-piped efforts
    designed to meet a given entity's needs. However, this is a significant
    change in how agencies acquire new system capacity and raises numerous
    complex issues that have far-reaching implications for the

    54

    DHS, Information Technology Investments and the Future of the eMerge2
    Program (Washington, D.C.: Mar. 29, 2006).

    Page 41 GAO-06-970 FFMIA Fiscal Year 2005 Results

    government and private sector shared service providers. As we reported in
    March 2006,55 OMB has not yet fully defined and implemented the processes
    necessary to successfully complete the financial management line of
    business initiative.

    OMB has been proactive since the beginning of the financial management
    line of business initiative in making speeches, discussing the initiative
    with the media, including it in the President's budget request,
    highlighting it on its Web site, and issuing draft guidance. Until
    recently there were limited tools and guidance available. In our March
    2006 report,56 we found, for example, that the requirements for agencies
    and private sector firms to become shared service providers and the
    services that they must provide have not been adequately documented or
    effectively communicated to agencies and the private sector. In addition,
    OMB had not provided shared service providers with standard document
    templates needed to minimize risk, provide assurance, and develop
    understandings with customers on topics such as service-level agreements
    and a concept of operations. We made a number of recommendations to
    address these issues, and OMB has been taking steps to address them. For
    example, in May 2006, OMB issued an initial competition framework57 and
    draft Migration Planning Guidance that was circulated to agencies and the
    public for comment and included some of this important information. The
    Migration Planning Guidance issued in September 2006 included change
    management best practices and templates for service level agreements and
    project plans, among other items. As explained later, FSIO plays a key
    role in developing the guidance to move the financial management line of
    business forward.

    OMB has stated that agencies will consistently meet cost, schedule, and
    performance goals when implementing new financial management systems once
    the financial management line of business is fully realized. However,
    agencies' financial management system problems may not all be solved by
    moving to a shared service provider and this may actually create
    additional problems if agencies put less focus on their risk management
    and financial management efforts. In addition, there may be some
    misconception that moving to a shared service provider would guarantee

    55GAO-06-184.

    56GAO-06-184.

    See OMB Memorandum, Competition Framework for Financial Management Lines
    of Business Migrations (May 22, 2006), for the initial Competition
    Framework which will be incorporated into the Migration Planning Guidance.

    Page 42 GAO-06-970 FFMIA Fiscal Year 2005 Results

    an agency of getting a clean audit opinion and being compliant with FFMIA.
    There are a number of factors that affect FFMIA compliance, including the
    quality of transaction data in agency feeder systems, the success of
    converting data from legacy systems, and the interaction of people,
    process, and technology within an agency's environment.

    In March 2006,58 we reported that careful consideration of the following
    four concepts, each one building upon the next, would be integral to the
    success of OMB's initiatives and could help break the cycle of failure in
    implementing financial management systems. The four concepts were

            (1)
                    developing a concept of operations, (2) defining standard
                    business processes, (3) developing a strategy for ensuring
                    that agencies migrate to a limited number of service
                    providers in accordance with OMB's stated approach, and (4)
                    defining and effectively implementing disciplined processes
                    necessary to properly manage the specific projects. Because
                    these issues have not been addressed, a firm foundation to
                    address the long-standing problems that have impeded success
                    has not yet been established. A concept of operations would
                    help provide the foundation for the financial management line
                    of business. An effective concept of operations would
                    describe, at a high level, (1) how all of the various
                    elements of federal financial systems and mixed systems
                    relate to each other and

    (2)
               how information flows from and through these systems. A concept of
               operations would provide a useful tool to explain how financial
               management systems at the agency and governmentwide levels can
               operate cohesively. It would be geared to a governmentwide
               solution rather than individual agency stove-piped efforts.
               Because the federal government has lacked such a document, a clear
               understanding of the interrelationships among federal financial
               systems and how the shared service provider concept fits into this
               framework has not yet been achieved.

    Standard business processes are critical to implementing the financial
    management line of business and need to be defined and communicated to all
    federal agencies. Standard business processes promote consistency and
    provide the framework for agencies and shared service providers. OMB
    officials recognize that standardization is important and are developing a
    standard set of business processes in four areas: funds control, accounts

    58GAO-06-184.

    payable, accounts receivable, and financial reporting. As illustrated
    previously in figure 6, OMB is also developing a common accounting code
    that may help address some of this lack of standardization. According to
    OMB officials, OMB also has other initiatives under way to develop
    standard interfaces for feeder systems such as acquisitions. While these
    are positive steps, there are numerous other areas where standardization
    is important, such as inventory, supplies, and material management as well
    as the loan management areas. Absent this standardization, shared service
    providers have been designated without common business rules and potential
    customer agencies continue to implement and operate individual stove-piped
    systems that may require additional work to adopt these processes.

    To maximize the success of a new system acquisition, organizations need to
    consider the redesign of current business processes. As we noted in our

    Executive Guide: Creating Value Through World-class Financial
    Management,59 leading finance organizations have found that productivity
    gains typically result from more efficient processes, not from simply
    automating old processes. In the past, agencies have resisted change and
    failed to develop transition plans, reengineer business processes, and
    limit customization. Agencies may continue to resist change and this
    approach for outsourcing their financial management systems because of the
    perceived (1) loss of control of their own data, (2) potential increase in
    costs with a decrease in the level of customer service and quality,

    (3) inability of providers to meet specific user needs, (4) loss of
    control to upgrade the system, and (5) negative effect on an agency's
    individual employees. The shared service provider concept will still
    require that agencies address long-standing human capital problems by
    incorporating elements of strategic workforce planning such as aligning an
    organization's human capital program with its current and emerging mission
    and programmatic goals, and developing long-term strategies for acquiring,
    developing, and retaining an organization's total workforce to meet the
    needs of the future.

    A clear migration strategy for implementing the financial management line
    of business will be crucial. However, OMB has not articulated a clear and
    measurable strategy for achieving this goal. This is important because
    there has been a historical tendency for agencies and units within
    agencies

    GAO, Executive Guide: Creating Value Through World-class Financial
    Management, GAO/AIMD-00-134 ( Washington, D.C.: April 2000).

    Page 44 GAO-06-970 FFMIA Fiscal Year 2005 Results

    to prefer internally developed processes and resist standardization. OMB's
    general principle is that agencies should migrate to shared service
    providers when it is cost effective to do so and they have maximized the
    useful life and investment in the current system, which averages about 5
    to 7 years. According to OMB's draft Migration Planning Guidance, it is
    anticipated that within 10 years all agencies will have decided whether to
    migrate their technology hosting and application management to a shared
    service provider, or will have become a shared service provider
    themselves. However, OMB does not plan to establish a specific migration
    path or time table for agencies to move to a shared service provider. It
    is not clear how this will impact the adoption of this initiative. Given
    the pressures to reduce budgets, instilling discipline with respect to
    following a clear migration path will be essential. Furthermore, without a
    clear migration path, while some agencies may readily migrate to a shared
    service provider to minimize the tremendous undertaking of implementing or
    significantly upgrading a financial system, other agencies will likely
    perpetuate the waste of taxpayer dollars previously described related to
    failed system implementation efforts.

    Whether agencies move to a shared service provider or implement their own
    systems, they must have disciplined processes (e.g., testing, requirements
    management, and risk management) in place to achieve the intended results
    within established resources on schedule. Effective implementation and
    testing processes are still required to ensure that the system delivers
    the desired functionality on time and within budget. Agencies have
    frequently struggled to implement key best practices when implementing
    commercial off-the-shelf financial management systems and relied too
    heavily on JFMIP testing and certification. A standard set of best
    practices will be needed to guide the migration from legacy systems to new
    systems and shared service providers. The Migration Planning Guidance is a
    good first step in stressing the importance of this standard set of best
    practices.

        Financial Systems Integration Office Established and Priorities Identified

    In accordance with a December 2004 memorandum,60 JFMIP responsibilities
    were realigned and the four JFMIP principals61 will continue to meet at
    their discretion to discuss major financial management issues. FSIO has
    been established with staff from the previous JFMIP program management
    office to address some of the former JFMIP responsibilities. According to
    a December 2005 OMB memorandum,62 the governance structure for financial
    management system initiatives gives FSIO direct responsibility for
    completing priority projects under the financial management line of
    business, such as developing the Migration Planning Guidance. As depicted
    in figure 7, OMB will provide oversight and guidance to FSIO on priorities
    and expected performance, in consultation with the FSIO Transformation
    Team of the CFO Council. According to OMB, the updated governance
    structure ensures that the FSIO, financial management line of business,
    and the FSIO Transformation Team do not operate in separate stovepipes.
    Responsibility for work products will now rest with FSIO where full-time
    dedicated staff including the FSIO Executive Director will be held
    accountable for achieving financial management line of business
    milestones. FSIO will coordinate the collection and expenditure of
    financial management line of business funds.

    60OMB, Realignment of Responsibilities for Federal Financial Management
    Policy and Oversight, Memorandum (Washington, D.C.: Dec. 2, 2004).

    61

    The JFMIP principals are the Comptroller General of the United States, the
    Secretary of the Treasury, and the Directors of OMB and OPM.

    62

    OMB, Update on the Financial Management Line of Business and the Financial
    Systems Integration Office, Memorandum (Washington, D.C.: Dec. 16, 2005).

    Page 46 GAO-06-970 FFMIA Fiscal Year 2005 Results

    Figure 7: Governance Structure

                                          FSIO

    Source: Office of Management and Budget.

    OMB will continue its role as Executive Sponsor of the financial
    management line of business. In December 2005, FSIO moved from GSA's
    Office of the Chief Financial Officer to the Office of Governmentwide
    Policy, Office of Technology Strategy (OTS). OMB named GSA the managing
    partner responsible for project management of the financial management
    line of business. Specifically, GSA's responsibilities include organizing
    the work effort, involving the Federal CFO community in the initiative,
    and setting the schedule of priorities with input from Executive Steering
    Committee members selected from partner agencies. The Executive Steering
    Committee provides strategic direction and agency sponsorship, assists in
    priority setting, and approves partner agency resource contributions. The
    members of the committee meet quarterly or on an as-needed basis and are
    comprised of the FSIO Executive Director, six representatives from CFO Act
    agencies at the CFO or Deputy CFOlevel, a non-voting representative from
    OMB's Office of E-Government and a non-voting representative from OMB's
    Office of Federal Financial Management. The members were selected from the
    CFO Act agencies to represent diverse perspectives in regards to size of
    agency, financial management technical platform, and migration status.

    The FSIO Transformation Team meets monthly and has a larger membership
    than the Executive Steering Committee, including agency representatives
    from all CFO Act agencies. The team functions as an advisory group to the
    Executive Steering Committee, manages the delivery of interdisciplinary
    work packages, and makes recommendations to the FSIO Executive Committee
    and the financial management line of business managing partner. The team
    is responsible for: (1) providing an internal review function for final
    work products, (2) providing recommendations to the financial management
    line of business project management office, and (3) continuously seeking
    to refine processes to increase the quality of and buy-in for their work
    products.

    In terms of mission and scope, FSIO has three major areas of
    responsibilities: (1) continuing its primary role of core financial system
    requirements development, testing, and certification; (2) providing
    support to the federal financial community by taking on special priority
    projects as determined by the OMB Controller, CFO Council, and the FSIO
    Executive Director; and (3) conducting outreach through an annual
    financial management conference sponsored by the JFMIP principals and
    other related activities. The projects that the FSIO undertakes will
    directly reflect the priorities of the CFO community and OMB. The priority
    projects to be undertaken in the near term will relate to the transparency
    and standardization initiatives of the financial management line of
    business, which were previously discussed and illustrated in figures 6 and
    7.

        Opinions on Internal Control May Further Strengthen New Internal Control
        Reporting Requirements

    Another key initiative for improving financial management in the federal
    government was OMB's December 2004 revision of Circular No. A-123,63 which
    we support, and was effective at the start of fiscal year 2006.64
    Financial systems weaknesses are frequently caused by a lack of adequate
    internal control within an agency. The revisions to OMB Circular No. A-123
    were intended to strengthen the requirements for conducting management's
    assessment of internal control over financial reporting at CFO Act
    agencies. One major revision requires CFO Act agency management to
    annually provide a separate assurance statement on internal control over
    financial reporting in its performance and accountability report, along
    with a report on identified material weaknesses and corrective actions.
    The revision also establishes that OMB may, at its discretion, require a
    CFO Act agency to obtain an opinion on internal control over financial
    reporting.

    We view auditor opinions on internal control over financial reporting as
    an important component of monitoring the effectiveness of an entity's risk
    management and accountability systems. OMB's efforts to enhance Circular
    No. A-123 through the December 2004 revision and its continued efforts to
    improve the quality of internal control in the federal government
    financial management environment reflect substantial progress in both the
    criteria and expectations for this issue. As we point out in our recent
    report65 on this issue, because agencies are not uniformly ready for such
    audits, specific criteria to ascertain when an agency should initially be
    required to obtain an audit opinion on its internal control over financial
    reporting are critical to ensuring that the internal control audits fully
    contribute to the overarching goal of ongoing improvement in federal
    agency internal control and accountability. Additionally, implementing a
    multiyear cycle for an opinion on internal control over financial
    reporting could assist in mitigating the cost of the requirement while
    still providing an effective quality control mechanism for ascertaining
    that management's assessment of its internal control is reliable. Although
    all of the benefits associated with obtaining an audit opinion on internal
    control are not

    63

    OMB Circular No. A-123, Management's Responsibility for Internal Control
    (revised Dec. 2004).

    64GAO, Financial Management: Effective Internal Control Is Key to
    Accountability, GAO-05-321T (Washington, D.C.: Feb. 16, 2005).

    65

    GAO, Internal Control: Analysis of Joint Study on Estimating the Costs and
    Benefits of Rendering Opinions on Internal Control over Financial
    Reporting in the Federal Government , GAO-06-255R (Washington, D.C.: Sept.
    6, 2006).

    quantifiable in monetary terms, it is clear that having set criteria as to
    when an agency should initially be required to obtain an auditor opinion
    on internal control over financial reporting would be a key oversight
    mechanism for the Congress and ultimately the U.S. taxpayer.

        Sustained and Committed Leadership Is Key to Success for Financial
        Management Initiatives

    Sustained leadership will be key to a successful strategy for moving
    federal agencies towards consolidated financial management systems and
    FFMIA compliance. In our Executive Guide: Creating Value Through
    World-class Financial Management,66 we found that leading organizations
    made financial management improvement an entitywide priority by, among
    other things, providing clear, strong executive leadership. We also
    reported that making financial management a priority throughout the
    federal government involves changing the organizational culture of federal
    agencies. Much work remains to develop a change management strategy to
    minimize the risk associated with the implementation of the financial
    management line of business initiative. Because the tenure of political
    appointees is relatively short, the current and future administrations
    must continue a strong emphasis on top-notch financial management. In
    addition, continued attention and oversight by the Congress is crucial to
    the success of these initiatives and federal financial management reform.

    The leadership and support demonstrated by the Congress have been and
    continue to be essential in the reform of financial management in the
    federal government. As previously discussed, the legislative framework
    provided by the CFO Act and FFMIA, among others, established a solid
    foundation to stimulate change needed to achieve sound financial systems
    management. Further, in October 2004, the Congress added DHS to the list
    of CFO Act agencies and thus subject to FFMIA in fiscal year 2005.
    Sustained congressional interest in these issues has been demonstrated by
    the number of hearings on federal financial management and reform held
    over the past several years. For example, hearings have recently been held
    on the financial management line of business initiative that provided a
    constructive discussion on some of the challenges inherent in such a large
    undertaking. It is critical that the various appropriations, budget,
    authorizing, and oversight committees hold agency top management
    accountable for resolving these problems and that the committees continue
    to support improvement efforts.

    66

    GAO/AIMD-00-134.

      Conclusions

    The size and complexity of the federal government and the long-standing
    nature of its financial management systems weaknesses continues to present
    a formidable management challenge. Modernizing and improving financial
    management systems will require continued attention from the highest
    levels of government. We recognize that it will take time, investment, and
    sustained emphasis on correcting these deficiencies to improve federal
    financial management systems to the level required by FFMIA. However, with
    concerted and coordinated effort, including attention from top agency
    management and the Congress, the federal government can make progress
    toward improving its financial management systems and thus achieve the
    goals of the CFO Act and provide accountability to the nation's taxpayers.

    We continue to be concerned that the full nature and scope of the problems
    have not yet been identified because most auditors have only provided
    negative assurance in their FFMIA reports. We also believe the law
    requires auditors to provide positive assurance on FFMIA compliance.
    Therefore, we reaffirm our recommendation made in prior reports that OMB
    revise its current FFMIA guidance to require agency auditors to provide a
    statement of positive assurance when reporting an agency's systems to be
    in substantial compliance with FFMIA. A key benefit of providing positive
    assurance is that auditors will need to perform additional audit
    procedures in order to have a strong basis for definitively stating
    whether agencies' financial management systems substantially comply with
    FFMIA's three requirements. We also reaffirm our other prior
    recommendation for OMB to explore further clarification of the definition
    of "substantial compliance" in its FFMIA guidance to encourage consistent
    reporting among agency auditors. As we have stated in prior reports,67 the
    auditors that we interviewed continue to express concerns about providing
    positive assurance in reporting on agency systems' FFMIA compliance due to
    a perceived need for a clearer definition of substantial compliance.
    Further, some auditors that we interviewed stated that a change in OMB's
    guidance on FFMIA reporting will be necessary in order for them to provide
    an opinion on FFMIA compliance.

    Agency Comments and Our Evaluation

    In written comments (reprinted in app. VI) on a draft of this report, OMB
    generally agreed with our assessment that while federal agencies continue
    and Our Evaluation to make progress in addressing financial management
    systems

    67 GAO-02-29 , GAO-03-31, GAO-05-20, andGAO-05-881.

    weaknesses, many agencies still need to make improvements to produce the
    information needed to efficiently and effectively manage day-to-day
    operations. As in previous years, OMB did not see the necessity of our
    recommendation for agency auditors to provide a statement of positive
    assurance when reporting agency systems to be in substantial compliance
    with the requirements of FFMIA. While OMB commended Labor's auditors for
    performing the additional level of audit work needed to provide positive
    assurance of compliance with FFMIA and encouraged similar efforts at other
    agencies, OMB stated that requiring a statement of positive assurance
    would prove only marginally useful.

    OMB stated that the goals of its various initiatives-the President's
    Management Agenda (PMA), the Financial Management Line of Business
    (FMLOB), and the strengthened internal control requirements incorporated
    into the revised OMB Circular No. A-123, Management's Responsibility for
    Internal Control-align with the goal of FFMIA to create the full range of
    information needed for day-to-day management. From OMB's perspective, the
    broad scope of the PMA and the fundamental changes occurring under the
    FMLOB initiative, combined with the strengthened reporting requirements of
    Circular No. A-123, are helping agencies to identify and correct FFMIA
    deficiencies.

    While we agree that the PMA, FMLOB, and OMB Circular No. A-123 initiatives
    are helping to drive improvements, auditors need to consider other aspects
    of financial management systems as well when assessing FFMIA compliance
    that are not fully addressed through the current reporting structure. For
    example, in preparing the PMA scorecard assessments, OMB officials meet
    with agencies to discuss a number of financial management issues and have
    systems demonstrations. Our concern is that some of the information
    provided by this approach does not come under audit scrutiny and may not
    be reliable. Similarly, internal control assessments performed under
    Circular No. A-123 are based on management's judgment and are subject to
    an opinion-level review by independent auditors only in limited
    circumstances. From our perspective, an opinion by an independent auditor
    on FFMIA compliance would confirm whether an agency's systems
    substantially met the requirements of FFMIA and provide additional
    confidence in the information provided as a result of the PMA, FMLOB, and
    Circular No. A-123 initiatives. Finally, we continue to believe that a
    statement of positive assurance is a statutory requirement under the act.

    With regard to our prior recommendation, which we reaffirmed in this
    report, for revised guidance that clarifies the definition of substantial
    compliance, OMB said that the experience obtained from helping agencies
    implement the high standards incorporated in the PMA and the FMLOB will
    allow a further refinement of the FFMIA indicators associated with
    substantial compliance. Therefore, OMB agreed to consider clarifying the
    definition of "substantial compliance" in future policy and guidance
    updates. As we noted in our prior reports,68 auditors that we interviewed
    expressed a need for clarification regarding the meaning of substantial
    compliance; and in fiscal year 2005, auditors for 7 of the 12 agencies we
    visited stated that additional guidance on the definition of substantial
    compliance would be useful.

    OMB and the Departments of Health and Human Services and Transportation
    also provided technical comments, which we incorporated as appropriate.

    We are sending copies of this report to the Chairman and Ranking Minority
    Member, Subcommittee on Federal Financial Management, Government
    Information, and International Security, Senate Committee on Homeland
    Security and Governmental Affairs, and to the Chairman and Ranking
    Minority Member, Subcommittee on Government Management, Finance, and
    Accountability, House Committee on Government Reform. We are also sending
    copies to the Director of the Office of Management and Budget, the heads
    of the 24 CFO Act agencies in our review, and agency CFOs and Inspectors
    General. Copies will be made available to others upon request. In
    addition, this report will be available at no charge on the GAO Web site
    at http://www.gao.gov.

    68 GAO-02-29, GAO-03-31 , GAO-05-20, and GAO-05-881.

    This report was prepared under the direction of McCoy Williams, Director,
    Financial Management and Assurance, who may be reached at (202) 5129095 or
    williamsm1@gao.gov if you have any questions. Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on the
    last page of this report. GAO staff who made key contributions to this
    report are listed in appendix VIII.

    David M. Walker Comptroller General of the United States

     Appendix I: Requirements and Standards Supporting Federal Financial Management

      Financial Management Systems Requirements

    The policies and standards prescribed for executive agencies to follow in
    developing, operating, evaluating, and reporting on financial management
    systems are defined in Office of Management and Budget (OMB) Circular No.
    A-127, Financial Management Systems. The components of an integrated
    financial management system include the core financial system,1 managerial
    cost accounting system, administrative systems, and certain programmatic
    systems. Administrative systems are those that are common to all federal
    agency operations,2 and programmatic systems are those needed to fulfill
    an agency's mission. Circular No. A-127 refers to the series of
    publications entitled Federal Financial Management Systems Requirements,
    initially issued by the Joint Financial Management Improvement Program's
    (JFMIP) Program Management Office (PMO) as the primary source of
    governmentwide requirements for financial management systems. However, as
    of December 2004, the Financial Systems Integration Office (FSIO) assumed
    responsibility for coordinating the work related to federal financial
    management systems requirements and OMB's Office of Federal Financial
    Management (OFFM) is responsible for issuing the new or revised
    regulations. In December 2004, the JFMIP Principals voted to modify the
    roles and responsibilities of JFMIP, resulting in the creation of FSIO.
    Appendix II lists the federal financial management systems requirements
    published to date. Figure 8 is the current model that illustrates how
    these systems interrelate in an agency's overall systems architecture.

    1

    Core financial systems, as defined by the Office of Federal Financial
    Management (OFFM), include managing general ledger, funding, payments,
    receivables, and certain basic cost functions.

    2

    Examples of administrative systems include budget, acquisition, travel,
    property, and human resources and payroll.

    Page 55 GAO-06-970 FFMIA Fiscal Year 2005 Results

     Appendix I: Requirements and Standards Supporting Federal Financial Management

                         Figure 8: Agency Systems Architecture

    Source: OMB, Core Financial Systems Requirements, OFFM-NO-0106
    (Washington, D.C.: January 2006).

                                     FFMIA Guidance

     	OMB establishes governmentwide financial management policies and
    requirements and has issued two sources of guidance related to FFMIA
    reporting. First, OMB Bulletin No. 01-02, Audit Requirements for Federal
    Financial Statements, dated October 16, 2000, prescribed specific language
    auditors should use when reporting on an agency system's substantial
    compliance with the three FFMIA requirements. Specifically, this guidance
    called for auditors to provide negative assurance when reporting on an
    agency system's FFMIA compliance. On August 23, 2006, OMB issued Bulletin
    No. 06-03, Audit Requirements for Federal Financial Statements, which
    superseded OMB Bulletin No. 01-02. This bulletin did not substantially
    revise the FFMIA audit guidance included in Bulletin No. 01-02. Second, in
    OMB Memorandum, Revised Implementation Guidance for the Federal Financial
    Management Improvement Act (Jan. 4, 2001), OMB provides guidance for
    agencies and auditors to use in assessing substantial compliance. The
    guidance describes the factors that should be

    Appendix I: Requirements and Standards Supporting Federal Financial
    Management

    considered in determining whether an agency's systems substantially comply
    with FFMIA's three requirements. Further, the guidance provides examples
    of the types of indicators that should be used as a basis for assessing
    whether an agency's systems are in substantial compliance with each of the
    three FFMIA requirements. Finally, the guidance discusses the corrective
    action plans, to be developed by agency heads, for bringing their systems
    into compliance with FFMIA.

    We have worked in partnership with representatives from the President's
    Council on Integrity and Efficiency (PCIE) to develop and maintain the
    joint GAO/PCIE Financial Audit Manual (FAM). The FAM provides specific
    procedures auditors should perform when assessing FFMIA compliance.3 As
    detailed in appendix V, we have also issued a series of checklists to help
    assess whether agencies' systems meet systems requirements. The FAM
    guidance on FFMIA assessments recognizes that while financial statement
    audits offer some assurance regarding FFMIA compliance, auditors should
    design and implement additional testing to satisfy FFMIA criteria.

    OMB Circular No. A-127 also requires agencies to purchase commercial
    off-the-shelf (COTS) software that has been tested and certified through
    the PMO software certification process when acquiring core financial
    systems. However, in December 2004, OMB transferred the responsibility of
    certifying systems to FSIO as part of the realignment of JFMIP. The
    certification process does not eliminate or significantly reduce the need
    for agencies to develop and conduct comprehensive testing efforts to
    ensure that the COTS software meets their requirements. Moreover, core
    financial systems certification does not mean that agencies that install
    these packages will have financial management systems that are compliant
    with FFMIA. Many other factors can affect the capability of the systems to
    comply with FFMIA, including modifications made to the FSIO-certified core
    financial management systems software and the validity and completeness of
    data from feeder systems.

    3 GAO-01-765G , sections 701, 701A, 701B, and 260.58-.60.

     Appendix I: Requirements and Standards Supporting Federal Financial Management

      Federal Accounting Standards

    The Federal Accounting Standards Advisory Board (FASAB)4 promulgates
    federal accounting standards and concepts that agency chief financial
    officers use in developing financial management systems and preparing
    financial statements. FASAB develops the appropriate accounting standards
    and concepts after considering the financial and budgetary information
    needs of the Congress, executive agencies, and other users of federal
    financial information and comments from the public. FASAB forwards the
    standards and concepts to the Comptroller General, the Director of OMB,
    the Secretary of the Treasury, and the Director of the Congressional
    Budget Office (CBO) for a 90-day review. If, within 90 days, neither the
    Comptroller General nor the Director of OMB objects to the standard or
    concept, then it is issued and becomes final. FASAB announces finalized
    concepts and standards in The Federal Register.

    The American Institute of Certified Public Accountants designated the
    federal accounting standards promulgated by FASAB as being generally
    accepted accounting principles for the federal government. This
    recognition enhances the acceptability of the standards, which form the
    foundation for preparing consistent and meaningful financial statements
    both for individual agencies and the government as a whole. Currently,
    there are 30 Statements of Federal Financial Accounting Standards (SFFAS)
    and 4 Statements of Federal Financial Accounting Concepts (SFFAC).5 The
    concepts and standards are the basis for OMB's guidance to agencies on the
    form and content of their financial statements and for the government's
    consolidated financial statements. Appendix III lists the concepts,
    standards, interpretations,6 and technical bulletins, along with their
    respective effective dates.

    4

    In October 1990, the Secretary of the Treasury, the Director of OMB, and
    the Comptroller General established FASAB to develop a set of generally
    accepted accounting standards and concepts for the federal government.
    Effective October 1, 2003, FASAB is comprised of six nonfederal or public
    members, one member from the Congressional Budget Office, and the three
    sponsors.

    5

    Accounting standards are authoritative statements of how particular types
    of transactions and other events should be reflected in financial
    statements. SFFACs explain the objectives and ideas upon which FASAB
    develops the standards.

    6

    An interpretation is a document of narrow scope that provides
    clarifications of original meaning, additional definitions, or other
    guidance pertaining to an existing federal accounting standard.

     Appendix I: Requirements and Standards Supporting Federal Financial Management

    FASAB's Accounting and Auditing Policy Committee (AAPC)7 assists in
    resolving issues related to the implementation of accounting standards.
    AAPC's efforts result in guidance for preparers and auditors of federal
    financial statements in connection with implementation of accounting
    standards and the reporting and auditing requirements contained in OMB's
    Bulletin No. 01-09, Form and Content of Agency Financial Statements (Sept.
    25, 2001), and Bulletin No. 01-02,8 Audit Requirements for Federal
    Financial Statements (Oct. 16, 2000). To date, AAPC has issued six
    technical releases, which are listed in appendix IV along with their
    release dates.

      U.S. Government Standard General Ledger

    The U.S. Government Standard General Ledger (SGL) was established by an
    interagency task force under the direction of OMB and mandated for use by
    agencies in OMB and Treasury regulations in 1986. The SGL promotes
    consistency in financial transaction processing and reporting by providing
    a uniform chart of accounts and pro forma transactions used to standardize
    federal agencies' financial information accumulation and processing
    throughout the year, enhance financial control, and support budget and
    external reporting, including financial statement preparation. The SGL is
    intended to improve data stewardship throughout the federal government
    enabling consistent reporting at all levels within the agencies and
    providing comparable data and financial analysis governmentwide.9

      Internal Control Standards

    Congress enacted legislation, 31 U.S.C. S: 3512(c), (d) (commonly referred
    to as the Federal Managers' Financial Integrity Act of 1982 (FMFIA)), to
    strengthen internal controls and accounting systems throughout the federal
    government, among other purposes. Issued pursuant to FMFIA, the
    Comptroller General's Standards for Internal Control in the Federal
    Government10 provides standards that are directed at helping agency

    7

    In 1997, FASAB, in conjunction with OMB, Treasury, GAO, the Chief
    Financial Officers Council, and the President's Council on Integrity and
    Efficiency, established AAPC to assist the federal government in improving
    financial reporting.

    8

    On August 23, 2006, OMB issued Bulletin No. 06-03, Audit Requirements for
    Federal Financial Statements. This bulletin did not substantially revise
    FFMIA audit guidance.

    9

    SGL guidance is published in the Treasury Financial Manual. Treasury's
    Financial Management Service is responsible for maintaining the SGL and
    answering agency inquiries.

    10GAO, Standards for Internal Control in the Federal Government,
    GAO/AIMD-00-21.3 (Washington, D.C.: Nov. 1999).

    managers implement effective internal control, an integral part of
    improving financial management systems. Internal control is a major part
    of managing an organization and comprises the plans, methods, and
    procedures used to meet missions, goals, and objectives. In summary,
    internal control, which under OMB's guidance for FMFIA is synonymous with
    management control, helps government program managers achieve desired
    results through effective stewardship of public resources.

    In December 2004, OMB revised Circular No. A-12311 (effective beginning
    with fiscal year 2006) to strengthen the requirements for conducting
    management's assessment of internal control over financial reporting.
    Significant revisions contained in Appendix A of the circular include
    requiring Chief Financial Officers (CFO) Act agency management to annually
    assess the adequacy of internal control over financial reporting, provide
    a report on identified material weaknesses and corrective actions, and
    provide a separate assurance statement on the agency's internal control
    over financial reporting. In initiating the revisions, OMB cited the
    internal control requirements for publicly traded companies that are
    contained in section 404 of the Sarbanes-Oxley Act of 2002
    (Sarbanes-Oxley).12 Sarbanes-Oxley was enacted in response to corporate
    accountability failures of several years prior to its enactment and
    contains a provision (section 404) calling for management's assessment of
    internal control over financial reporting similar to the long-standing
    requirements for executive branch agencies contained in FMFIA to issue
    annual statements of assurance over internal control in the agencies.
    Opinions on internal control over financial reporting as required by
    Sarbanes-Oxley for publicly traded companies are important to protect
    investors by improving the accuracy and reliability of corporate
    disclosures made pursuant to the securities laws. Regulators, public
    companies, audit firms, and investors generally agree that Sarbanes-Oxley
    has had a positive and significant impact on investor protection and
    confidence.

    11

    OMB Circular No. A-123, Management's Responsibility for Internal Control
    (revised Dec. 21, 2004).

    12

    Pub. L. No. 107-204, S: 404, 116 Stat. 745, 789 (July 30, 2002).

    Appendix II: Publications in the Federal Financial Management Systems
    Requirements Series

                               FFMSR document Issue date

        FFMSR-8 System Requirements for Managerial Cost Accounting February 1998

         JFMIP-SR-99-5 Human Resources & Payroll Systems RequirementsApril 1999

                 JFMIP-SR-99-8 Direct Loan System RequirementsJune 1999

                   JFMIP-SR-99-9 Travel System RequirementsJuly 1999

    JFMIP-SR-99-14 Seized Property and Forfeited AssetsSystems RequirementsDecember
                                          1999

              JFMIP-SR-00-01 Guaranteed Loan System RequirementsMarch 2000

               JFMIP-SR-00-3 Grant Financial System RequirementsJune 2000

           JFMIP-SR-00-4 Property Management Systems RequirementsOctober 2000

                JFMIP-SR-01-01 Benefit System RequirementsSeptember 2001

      JFMIP-SR-02-02 Acquisition/Financial Systems Interface RequirementsJune 2002

                 JFMIP-SR-03-01 Revenue System RequirementsJanuary 2003

     JFMIP-SR-03-02 Inventory, Suppliesand MaterialsSystem RequirementsAugust 2003

      JFMIP-SR-01-04 Framework for Federal Financial Management SystemsApril 2004

              OFFM-NO-0106 Core Financial System RequirementsJanuary 2006

                  OFFM-NO-0206 Insurance System RequirementsJune 2006

    Source: OMB's Office of Federal Financial Management (OFFM).

    Note: Effective December 1, 2004, all financial management system
    requirements documents and other guidance initially issued by the JFMIP
    were transferred to OFFM and remain in effect until modified.

    Appendix III: Statements of Federal Financial Accounting Concepts, Standards,
    Interpretations, and Technical Bulletins

      Concepts

                  SFFAC No. 1Objectives of Federal Financial Reporting

                             SFFAC No. 2 Entity and Display

                    SFFAC No. 3 Management's Discussion and Analysis

    SFFAC No. 4 Intended Audience and Qualitative Characteristics for the
    Consolidated Financial Report of the United States Government

                          Standards Effective for fiscal yeara

    SFFAS No. 1 Accounting for Selected Assetsand Liabilities

    SFFAS No. 2 Accounting for Direct Loansand Loan Guarantees

    SFFAS No. 3 Accounting for Inventory and Related Property

    SFFAS No. 4 Managerial Cost Accounting Conceptsand Standards for the
    Federal Government

    SFFAS No. 5 Accounting for Liabilities of the Federal Government

    SFFAS No. 6 Accounting for Property, Plant, and Equipment

    SFFAS No. 7 Accounting for Revenue and Other FinancingSourcesand Concepts
    for Reconciling Budgetary and Financial Accounting

    SFFAS No. 8 SupplementaryStewardship Reporting

    SFFAS No. 9 Deferral of the Effective Date of Managerial Cost
    AccountingStandards for the Federal Government in SFFAS No. 4

    SFFAS No. 10 Accounting for Internal Use Software

    SFFAS No. 11 Amendments to Accounting for Property, Plant, and
    Equipment-Definitional Changes

    SFFAS No. 12 Recognition of Contingent Liabilities Arising from
    Litigation: An Amendment of SFFASNo. 5, Accounting for Liabilities of the
    Federal Government

    SFFAS No. 13 Deferral of Paragraph 65.2-Material Revenue-Related
    Transactions Disclosures

    SFFAS No. 14 Amendments to Deferred Maintenance Reporting

    SFFAS No. 15 Management's Discussion and Analysis

    SFFAS No. 16 Amendments to Accounting for Property, Plant, and Equipment

    SFFAS No. 17 Accounting for Social Insurance

    SFFAS No. 18 Amendments to Accounting Standards for Direct Loansand Loan
    Guarantees in Statement of Federal Financial Accounting Standards No. 2

    SFFAS No. 19 Technical Amendments to Accounting Standards for Direct
    Loansand Loan Guarantees in Statement of Federal Financial Accounting
    Standards No. 2

    SFFAS No. 20 Elimination of Certain Disclosures Related to Tax Revenue
    Transactions by the Internal Revenue Service, Customs, and Others

    SFFAS No. 21 Reporting Corrections of Errorsand Changes in Accounting
    Principles

    SFFAS No. 22 Change in Certain Requirements for Reconciling Obligationsand
    Net Cost of Operations

    SFFAS No. 23 Eliminating the Category National Defense Property, Plant,
    and Equipment

    SFFAS No. 24 Selected Standards for the Consolidated Financial Report of
    the UnitedStatesGovernment 2002

    SFFAS No. 25 Reclassification of Stewardship Responsibilitiesand
    Eliminating the Current ServicesAssessment 2006

    Appendix III: Statements of Federal Financial Accounting Concepts,
    Standards, Interpretations, and Technical Bulletins

    Concepts
    SFFAC No. 1Objectives of Federal Financial Reporting
    SFFAC No. 2 Entity and Display
    SFFAC No. 3 Management's Discussion and Analysis
    SFFAC No. 4 Intended Audience and Qualitative Characteristics for the
    Consolidated Financial Report
    of the United States Government
    Standards                                             Effective for fiscal
                                                                           year a
    SFFAS No. 26 Presentation of Significant Assumptions
    for the Statement of Social Insurance:
    Amending SFFAS 25                                                     2006
    SFFAS No. 27 Identifying and Reporting Earmarked                      2006
    Funds
    SFFAS No. 28 Deferral of the Effective Date of
    Reclassification of the Statement of Social
    Insurance:
    Amending SFFAS 25 and 26                                              2006
    SFFAS No. 29 Heritage Assetsand Stewardship Land                      2006
    SFFAS No. 30 Inter-Entity Cost Implementation
    Amending SFFAS 4, Managerial Cost Accounting
    Standardsand Concepts                                                 2009
    Interpretations
    No. 1 Reporting on Indian Trust Funds
    No. 2 Accounting for Treasury Judgment Fund
    Transactions
    No. 3 Measurement Date for Pension and Retirement
    Health Care Liabilities
    No. 4 Accounting for Pension Payments in Excess of
    Pension Expense
    No. 5 Recognition by Recipient Entities of Receivable
    Nonexchange Revenue
    No. 6 Accounting for Imputed Intra-departmental Costs
    Technical bulletins
    TB 2000-1 Purpose and Scope of FASAB Technical
    Bulletinsand Procedures for Issuance
    TB 2002-1 Assigning to Component Entities Costsand
    Liabilities That Result From Legal Claims
    Against the Federal Government
    TB 2002-2 Disclosures Required by Paragraph 79(g) of
    SFFAS 7, Accounting for Revenue and Other
    Financing Sourcesand Concepts for Reconciling
    Budgetary and Financial Accounting
    TB 2003-1 Certain Questionsand Answers Related to the
    Homeland Security Act of 2002

    Source: FASAB.

    a

    Effective dates do not apply to Statements of Federal Financial Accounting
    Concepts, Interpretations, and Technical Bulletins.

                          Appendix IV: AAPC Technical Releases

                          Technical release AAPC release date

             TR-1 Audit Legal Representation Letter Guidance March 1, 1998

    TR-2 Determining Probable and Reasonably Estimable for Environmental
    Liabilities in the Federal March 15, 1998 Government

    TR-3 Preparing and Auditing Direct Loan and Loan Guarantee SubsidiesUnder
    the Federal Credit Reform July 31, 1999 Act

        TR-4 Reporting on Non-Valued Seized and Forfeited Property July 31, 1999

    TR-5 Implementation Guidance on SFFAS No. 10: Accounting for Internal Use
                                 Software May 14, 2001

    TR-6 Preparing Estimates for Direct Loan and Loan Guarantee SubsidiesUnder
    the Federal Credit Reform January 2004 Act (Amendments to TR-3)

                                     Source: FASAB.

    Appendix V: Checklists for Reviewing Systems under the Federal Financial
    Management Improvement Act

                                  Checklist Issue date

      GAO/AIMD-00-21.2.3 Human Resourcesand Payroll Systems RequirementsMarch 2000

    GAO-01-99G Seized Property and Forfeited AssetsSystems RequirementsOctober 2000

               GAO/AIMD-21-2.6 Direct Loan System RequirementsApril 2000

                   GAO/AIMD-21.2.8 Travel System RequirementsMay 2000

     GAO/AIMD-99-21.2.9 System Requirements for Managerial Cost Accounting January
                                          1999

               GAO-01-371G Guaranteed Loan System RequirementsMarch 2001

             GAO-01-911G Grant Financial System RequirementsSeptember 2001

           GAO-02-171G Property Management Systems RequirementsDecember 2001

                   GAO-04-22G Benefit System RequirementsOctober 2003

    GAO-04-650G Acquisition/Financial Systems Interface RequirementsJune 2004

              GAO-05-225G Core Financial System RequirementsFebruary 2005

                                      Source: GAO.

    Appendix VI: Comments from the Office of Management and Budget

    Appendix VII: Auditors' FFMIA Assessments for Fiscal Year 2005

    Department of Agriculture                      X       X       X         X
    Department of Commerce                 X
    Department of Defense                          X       X       X         X
    Department of Education                        X       X
    Department of Energy                           X       X       X
    Department of Health and Human                 X       X                 X
    Services
    Department of Homeland Security                X       X       X         X
    Department of Housing and Urban                X       X
    Development
    Department of the Interior                     X               X         X
    Department of Justice                          X       X       X         X
    Department of Labor                    X
    Department of State                            X       X       X
    Department of Transportation                   X       X       X         X
    Department of the Treasury                     X       X       X         X
    Department of Veterans Affairs                 X       X
    Agency for International Development           X       X                 X
    Environmental Protection Agency        X
    General Services Administration                X       X
    National Aeronautics and Space                 X       X       X         X
    Administration
    National Science Foundation            X
    Nuclear Regulatory Commission                  X       X
    Office of Personnel Management         X
    Small Business Administration                  X       X       X         X
    Social Security Administration         X
    Total                                  6      18      17      11        11

      Source: GAO, prepared from analysis of fiscal year 2005 financial statement
                                     audit reports.

    Appendix VIII: GAO Contact and Staff Acknowledgments

      GAO Contact

    McCoy Williams, (202) 512-9095

    In addition to the contact named above, Kay L. Daly, Assistant Director;

    Jeremy Cockrum; Debra Cottrell; Daniel Egan; C. Robin Hodge; Michael
    LaForge; W. Stephen Lowrey; Bennet E. Severson; and George Warnock made
    key contributions to this report.

    (195076)

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